FII’s pulled out close to 1 lakh crore from debt and equity in India.

As domestic equity markets tanked in the month of March, the sell-off was aided by large swaths of money being taken out of Indian markets by foreign institutional investors. The little support that share markets saw were from domestic institutional investors such as mutual funds, that were seen stocks at discounted prices. Prasanna Pathak, Head of Equity, Taurus Mutual Fund in an interview with Kshitij Bhargava of Financial Express Online explains why the investment strategies of foreign and domestic investors were so different, while he also sheds some light on what’s ahead for debt mutual funds. Here are the edited excerpts.

Mutual funds and FPIs have been doing the complete opposite of what the other did since March, why is so?

In March, due to the COVID scare, there was a big risk aversion and flight of money from all asset types and emerging markets to safe heaven like the US treasury. FII’s pulled out close to 1 lakh crore from debt and equity in India. The domestic institutions like MF and Insurance were supporting the markets and buying the dips.

Since April, many central banks across the world have resorted to large stimulus and printing of money. Such large easing and printing of money has led to a surge of liquidity and money was trying to find its way into various asset classes including emerging markets like India. So in April and May, on one hand FIIs were pumping money, the roles reversed with DII’s booking some profits.

We have seen such role reversals happen many times including the great sell-off and v-shaped recovery in 2008-09.

India is trying to unlock now, manufacturing is getting back on track but what do you think will be the consumption story going forward? 

Given the current scenario, it looks like discretionary consumption, especially the high-ticket items will take a long time to come back meaningfully. However, there may be a demand pick-up in certain categories like two-wheeler, low-end cars for personal travel and electronic goods like laptop etc for work-from-home. Also, the rural economy is largely stable. Even, the tier-2 and 3 cities seem to be impacted to a lesser extent. They should lead to some bounce-back in consumption. 

Lastly, consumption doesn’t happen by consumers alone; companies need to push/innovate/get creative and offer value to get consumers to spend. The way consumers perceive value will change from category to category.

India needs to set the ball rolling for GDP growth, many are expecting that the government will go all-in for infrastructure development, what’s you take on this? And what sectors should investors look at to bet on India’s growth story?

The next six months are going to be tough for the economy. The government is expected to do its best on spending within the limited space available to it. Large shortfall in government revenue is expected over the next 6 months. So the government focus will be more on raising resources internally (divestment etc) and attracting foreign capital. So during these uncertain times, we believe that companies leveraged to the rural economy and agriculture may do better relatively. Also, defensives like Pharma, IT, FMCG and lesser affected sectors like telecom will do well.

This year has already seen a lot when it comes to Mutual funds, going forward how do you see the investor sentiment to be in terms of debt mutual funds?

Post the ILFS and NBFC crisis, things have been a little challenging for the Mutual Funds, especially funds with exposure to troubled promoters/companies. We expect the next 6 months to be challenging on the economy-front. Hence, investors should be vigilant about the portfolios of funds that they have invested in for the next 6 months at-least. Mutual funds and SEBI has taken the right steps in reducing exposures and risk management. Investor confidence towards debt funds will be back in the next 1 year or so.

It’s been a tough couple of months, how have traded in these months and what’s your plan in terms of trading now that India is unlocking. 

So, we have been relatively better placed with minimal exposure to NBFC and other companies with high-leverage. We have maintained exposure to companies with good-cash flows / strong balance-sheets and which can withstand short-term shocks. We continue to be positive on rural/agri- themes, telecom, pharma and IT sectors.