The Money Shift- Business News

The Money Shift

The low-down on which asset class will attract the most investors this year.

The Money Shift

In the last few months, the economy has been trying to get back on its feet, though with difficulty. In response, equity markets have also been volatile, struggling to retain the bullish sentiment. The introduction of long-term capital gains (LTCG) tax, rising crude oil prices, strengthening of dollar against the rupee and PSU bank frauds have hit sentiment. Benchmark indices fell 8 per cent in February and March.

Amid the turbulence, the retail investor has shown faith in equities As per data from the Association of Mutual Funds in India, or AMFI, the average assets under management, or AUM, of mutual funds stood at Rs22.71 lakh crore at the end of March, with the equity component being 30-35 per cent. While systematic investment plan, or SIP, accounts stood at over 2.11 crore, total collections in March were Rs7,119 crore. Seems like the 'Mutual Funds Sahi Hai' campaign is working its magic.

"Liquidity is good. We saw astonishing flow of money into mutual funds last year. This year also, the momentum in asset growth will continue, but the rate of growth will be slightly lower," says A. BalaSubramanian, AMFI Chairman and CEO of Aditya Birla Sun Life Mutual Fund. However, he is quick to add that there have been some outflows from equity-oriented funds in the last two-three months.

Analysts and fund managers say there has been a slow shift. "There has been some selling in balanced funds and we are seeing negative returns there," says Rajeev Thakkar, CIO, PPFAS MF. "There has been an outflow from arbitrage funds to the tune of Rs12,000 crore due to tax-related decisions of investors and profit-booking at the end of the financial year in March," says Balasubramanian. Inflows into equity funds in March were the smallest in 13 months even though they did not turn negative.


Until last year, the trend was clear. Interest rates were falling. With real estate and gold not giving good returns, investors turned to mutual funds. But with introduction of LTCG tax on mutual funds and inflation/interest rates rising, investors became worried. Also, geo-political tensions and trade wars between the United States and China made equity markets cool down slightly.

However, SIP numbers tell a bullish story. Fund managers say that despite equity markets turning volatile, the SIP mode of investing will gain momentum this year too. Amandeep Chopra, Group President and Head, Fixed Income, UTI Mutual Fund, says, "A lot of flows into equity mutual funds over the last 12 months are more or less long term (two-three years time frame) as they are mostly through SIPs. That trend will carry on. But incremental flows might get diverted." "Equities will appeal to investors if the return is upwards of 12 per cent. But with LTCG tax, the return differential is narrow. Equities should at least give 3-4 per cent more returns as compensation for the risk that one takes," says Balasubramanian.

So, to justify the risks the economy poses, which asset class is the Street pointing to? Clearly, it's not real estate or gold. Portfolio managers say the wind is blowing towards fixed income assets.

The Comeback

In recent months, there has been a pick-up in flows into fixed income funds. Bank deposit rates have also moved north. "One has already witnessed migration from fixed deposits to debt funds, the latter demonstrating that they can outperform fixed deposits," says Amandeep Chopra of UTI.

In April, big private banks increased deposit rates to around 7.35 per cent, from 6.50-6.75 per cent a few quarters ago. This makes fixed deposits an attractive avenue for investors with low risk appetite. "People can now look beyond traditional fixed income products like deposits and secondary market NCDs," says Amandeep.

Balasubramanain backs this. "In the last two-three months, we have seen Rs10,000-12,000 crore come into short-term and medium-term debt funds along with credit opportunity funds. These categories are becoming more attractive because of expected returns after tax as opposed to bank fixed deposits."

Out of Rs23 lakh crore AUM of the mutual fund industry, the equity component is Rs9 lakh crore, while the debt pie is about Rs10 lakh crore, followed by Rs4 lakh crore of liquid funds. The debt fund pie, says AMFI, should grow at 20-25 per cent on a year-on-year basis.

Why be bullish on select debt funds?

Crude oil is nearing the $80 a barrel mark. With inflationary concerns resurfacing, bond yields have rallied more than 60 basis points in just one month. Besides, the US Federal Reserve has signalled an increase in rates, which may put pressure on interest rates in India too. These factors will not support long-term debt funds. But they will work for short-term funds. "Long-term funds may underperform in the near term, especially from a one-year perspective, due to rising yields. But for short-term funds, the negative impact of rates moving up is muted and they will actually benefit. So, investors should focus on low duration, short term and credit risk funds," says Amandeep.

While debt funds are working their charm on investors, why is the glitter of gold not visible in these seemingly troubled times?

Has gold lost its sheen?

Gnanasekhar Thyagarajan, Director, Research, Commtrendz, says three months ago he expected a dramatic move in gold due to potential geo-political flare-ups and high interest rates and inflation. Uncertainty compels investors to buy gold as it is considered a safe haven. "The dramatic move has been elusive. It seems that US-Syria war or US-China trade fight are being perceived as temporary. Equity markets are showing far more resilience than anticipated. But how long can they withstand these? Borrowing in dollars is not cheap, crude oil and inflation are rising and so even though the interest in the metal has not risen much, gold will have to rally soon," he says.

In the last three-four months, gold has rallied only about 4 per cent, and not attracted investors as expected. But Pramod Kumar Agrawal, Chairman, The Gem and Jewellery Export Promotion Council, says, "Gold jewellery grew 10 per cent last financial year. This year too, it shall, conservatively speaking, grow at 10 per cent".

Interestingly, in March and April, demand from rural consumers lifted the overall sentiment. Thyagarajan says there has been a 15-20 per cent uptick in demand from both rural and urban consumers. But it seems unlikely that the retail investor, who has shown unflinching faith in equities, will seek solace in the yellow metal yet.

Mutual Funds sahi hai!

For conservative investors, debt funds are undoubtedly offering good value. But for young wealth creators with a risk appetite, the route leads to equity-oriented funds. "If you have at least a five-year view, build a strategy to invest in equities. Yes, large caps are at elevated levels and small and mid caps, despite the correction, are overvalued, but the domestic story is playing out well in select stocks," says Thakkar of PPFAS. "Mutual funds are allowed to invest in overseas stocks and so one should also look at foreign stocks that complement holdings here. Among the FANG (Facebook, Amazon, Netflix, Google) group, we like Facebook and Google," he says.

While 2016 was the year of low hanging fruits in the equity space, 2017 was when investors were rewarded rather quickly. But 2018 may be different. According to a Morgan Stanley report released in the first week of May, the bull market in India is intact. It says the clear winners in April were momentum stocks, stocks with maximum 12-month returns, low dividend yield, high beta and high financial leverage. This surely smells and feels like a bull market.

So, if the macros stress you, volatility worries you or tax dissuades you, remember the promise of an emerging market like India and that money, deployed well, would grow even at night!

Tripti Kedia is a freelancer based in Mumbai