There’s a lot of action in the markets and the mutual fund industry right now. The markets continue to be volatile on the back of the recent rate pause by the Reserve Bank of India, while debt funds have seemingly shed some of their attractiveness because of the removal of the indexation benefit on long-term capital gains. In a freewheeling chat with Outlook Money, Ajit Menon, chief executive officer of PGIM India Mutual Fund Pvt. Ltd, talks about investors’ strategy in these times, how to create wealth, and the fund house’s future plans
The equity market looks volatile and the developed economies appear to be at risk of a recession. How do you interpret this?
The markets could remain volatile, but range-bound in the near term. The surprise rate ‘pause’ by the Reserve Bank of India (RBI) because of the weakening of the economy in the near term, and headwinds like persistently high core inflation and the prospects of weak global growth will continue to remain a risk. We remain optimistic about the long-term potential of the markets driven by superior fair value growth of underlying companies and reasonable starting valuations.
What should be the strategy for retail investors in this scenario?
Investors must realise that their investment lifetime is more than 60 years—30 years of accumulating while working and 30 or more years of utilising the corpus till the end of life. Fund managers have a far shorter career and, therefore, the focus should be less on searching for star managers and more on finding comfort in a strong process that can protect against the risk of a downside.
We recommend investors to systematically invest in equities with a long-term view. Every equity investor should be prepared for more than 10-15 drops in the market of 20 per cent-plus during their investment lifetime.
The best is to recognise that your financial situation is unique as compared to others, and so you should find a good and trustworthy advisor who can help you with a proper asset allocation approach.
What is the most effective approach to creating wealth?
To protect your wealth, you need to diversify, but if you are looking at outsized wealth creation, only concentration may take you there. If you look at the richest people on earth, whether it’s Berkshire Hathaway, Tesla, Facebook, Oprah Winfrey or someone else, all their wealth is made on one stock. But it is risky for retail investors, and they should stick to diversification.
There are seven asset classes which can help make money. They’re not always negatively correlated, but they’re not perfectly correlated either. They balance each other out in some way.
With the removal of indexation benefits, are debt funds still in a favourable position? What should investors do?
The past year has seen central banks worldwide increase interest rates in response to hardening inflation. However, at the current juncture, the expectation is for slowing down the pace of hikes and probabilities are in favour of decrease in rates over the next few quarters. This is an opportune time for investors to add debt funds and take advantage of relatively higher accruals along with the potential for capital gains in the medium to long term.
Are debt funds on a par with fixed deposits (FDs) now? Will there be more pressure on fund managers to perform better?
Debt funds score over FDs in terms of benefits of diversification as well as providing better liquidity without penalties. I don't think that fund managers are driven by the fact that I have to beat fixed income. I think the parameter for them is competing with the benchmarks—they need to be equal to a benchmark or better than it.
A good active fixed-income manager can still do a good job for investors. After tax, these may still be better than FDs if held till maturiy, but the spread may not be that high. Previously, tax was a clear differentiator. Systematic withdrawals from a growth option of a debt fund is more optimal than getting interest payment from FDs from a tax-adjusted point of view.
Will this tax change affect inflows in debt MF schemes?
Inflows into fixed-income funds from retail and high net-worth individuals (HNIs) could slow down temporarily because of the withdrawal of the indexation and tax benefits. But their proportion into fixed-income schemes is fairly small. So, overall, the segment will continue to get inflows from the larger subset of institutional investors.
Longer-term schemes, which are largely subscribed by individual investors, may see some slowdown in terms of additions. Advisors and investors who follow more of an asset allocation approach will continue to allocate to fixed-income schemes across the spectrum depending on their goals.
You have a legacy of being a global asset manager? Are you planning to launch a new global fund of fund (FOF) in the light of the alterations in taxation?
Our approach to launching funds has never been to take advantage of any specific tax provision. That has been incidental though helpful on a relative basis. As far as FOFs in the international category goes, our approach has been to launch only strategies that are diversified.
Given that investors have larger allocation to the Indian markets and the international portion is a smaller sub-set, we believe it should be used to get exposure to a broad-based opportunity that includes sectors and ideas not available in the Indian market. Thematic ideas in this space can be attractive but it has more of a potential to damage investor experience as themes are subject to higher volatility.
Also, the limits are currently suspended by RBI so there is very little one can do at the current juncture.
We are not taking any decisions for domestic FOFs though we believe that they could offer some benefits in terms of design flexibility.
Are there any other new products PGIM is contemplating?
We have certain basic category gaps to fill in the large-and-mid-cap, focused equity, retirement, multicap and conservative hybrid spaces. We intend to launch strategies in some of these this year. We have also activated our AIF licence and plan to launch a strong category III strategy there. We also have the capabilities and the licence to launch products for specific categories of international investors.
Is the Indian MF industry shifting towards a low-cost or passive model with the introduction of numerous index funds and ETFs in the past two-three years?
There is space in the industry for both active and passive strategies to thrive alongside. There is also data to suggest that both active and passive funds tend to get more inflows if they have a good long-term compounding track record.
The rate of closure of new funds within a three-year period after launch in both spaces is quite high as they are not able to garner critical sizes for sustainable growth, given that incremental flows largely tend to gravitate to existing funds with good track records helped by the effect of long-term compounding.
From a revenue accretion point of view, the past few years have seen higher accretion from the mark-to-market impact of longer-term compounding on existing assets rather than net new flows. So, the consumer would simply prefer good risk-adjusted, long-term compounding track records of either category, active or passive.
What is your view on retirement planning?
Our first survey on retirement readiness with Neilsen NIQ published in 2020 had a few good insights. People tend to prioritise saving and investing for happy outcomes like the future of their children, spouses, their homes and cars. Retirement comes lower down the priority. Also, many retail investors tend to have one ‘catch-all’ corpus that they invest into which is not necessarily allocated to specific goals, such as retirement.
My view on retirement, especially for the service class, is that the biggest risk is not the probability of ending with an insufficient corpus. The bigger risk is one of concentration of your skill for most part of your working life and not being able to have multiple skills that you can monetise. If you can focus on developing more than one skill that you can monetise, whether that be teaching yoga, translating, baking, writing content, photography or others, then you never need to be anxious about retirement.