The negative news flow and the record downgrades of debt instruments has made investors wary of investing in fixed income funds, but such schemes should still be a part of an investor’s portfolio, says A. Balasubramanian, CEO, Aditya Birla Sun Life Asset Management Company. Mr. Balasubramanian, who manages assets totalling ₹2.65 lakh crore, believes that the ongoing crisis in the debt segment is at its peak and should subside soon as corporates are in the midst of resolution processes. Excerpts:
There have been a record number of debt downgrades in this year. Do you think debt schemes are going through their worst phase?
Definitely the last eight-nine months have been a tough time for mutual funds because of the fact that they have grown in size, and also because they’ve offered innovative products such as credit risk fund and accrual kind of funds. And these funds have a focus on investing in fixed income bearing securities.
And then if a downgrade happens, it has an effect on the price and the net asset value (NAV) of the scheme. Generally, people are not used to that kind of development under fixed income, as the assumption is that one will get linear return.
While you get return in the long run, you have to go through cycles because these schemes are completely pass through vehicles. While this is understood very well in equity, it’s not so much understood in fixed income. But after the current mayhem, investors will understand that fixed income can also be volatile. Debt capital market is going through a tough time which is due to local issues or our country specific issues in the credit market. We have seen such issues in the past. We saw in 1992, 2002, 2008-09 and then in 2013. This time around, I think the whole issue of credit market came on the back of IL&FS, which is a big institution in the country. Nobody understood the depth of the issues. But naturally, it had its own impact. If a big organisation is going under then of course it will have an impact. Thereafter, NBFCs started seeing a sudden tightness in liquidity. Then came series of downgrades.
Is it because of so many downgrades in the recent past such products have invited a lot of criticism though there are no fundamental issues with the products as such?
One must appreciate that mutual funds’ 100% disclosure practice does enable a better understanding of the portfolios.
At the same time, given the 100% disclosure, analysis both on exposure and its impact on the NAV is quite instantaneous, which leads to increase in noise levels. The news flow too has been quite frequent.
Hence, one has to stay patient to such noise level, as the recovery of loss is high due to the interest accrual component in a fixed income portfolio. As a result of this, if there is at all any loss, it is in the overall income or returns and not in the absolute value. Overall, India is doing well from a political point of view, but from the economic point of view there are challenges. While Reserve Bank of India has been cutting rates, banks are not cutting rates and passing on the benefits. We are getting into a vicious circle with sectors like real estate and automobiles needing liquidity, but NBFCs cannot lend as they have their own liquidity issues. In this environment, news flow will always be negative.
In May, the outflows from credit risk funds saw a three-fold rise compared to April. Do you expect a similar trend going ahead?
I think it’s done. I think we are at the peak of the crisis. We might stay here for some time and then we will see that it is coming down. We need one or two resolutions. The moment Zee resolution happens, one problem will be out. NCLT is looking at IL&FS and once a resolution is done, that problem would be out. Similarly for DHFL and ADAG. All the processes are on track. But the question mark is on the time frame and hence we all need patience.
As head of a fund house, how much are you dependent on credit rating agencies or do you have a robust internal risk mechanism?
As a fund house, we have always built internal capability. We never were solely dependent on rating agencies. We do take an opinion from them and that’s a must in any case as rating agencies only give an indicative stuff. We have made investments in people. And, that’s why if you see our exposure, we have ring fenced our structure so that no questions can be raised on our structure. But, if an issue of the scale of IL&FS happens, everyone will get affected.
So, do you think this is a time when investors can look at debt funds or will they be better off with equity?
Fixed income has to be a part of the portfolio, without any doubt. Around 50% of the portfolio should be in fixed income and the other 50% in equity and one should be flexible in the allocation. And, both equity and debt should be looked upon as long term bets.
Both assets can lose money, but you should hold for long term. Debt should not be looked upon as something with a one-year horizon. So, while one should always have fixed income in the portfolio, one must also remember that fixed income can also stay volatile.
Within the overall debt segment, which are the categories that a retail investor can look at?
Retail investors should look at liquid funds, one to three year funds like short duration and ultra short duration funds, and also the credit risk funds wherein one can put 10-15% of the portfolio.
How do you see the inflows in MFs going ahead considering that the markets have been quite volatile?
We should see some pick up. With the stable political environment, we are seeing a very high level of commitment by the newly elected members to drive the Indian economy to the next level among emerging markets. There will be lot of efforts put by the government to drive the next round of growth. There is optimism returning to the market. Now, the question is about earnings coming back, which takes time. But overseas investors look at India more seriously now because of political stability. We might probably see a decade of stability. So, if you look at a decade of stability, then economic growth has to come back along with that. Therefore, my view is there will be an increase in flows into the mutual funds, both in equity and fixed income.