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If at all, we have deployed cash balance in the market and our cash levels have remained virtually stagnant over the last eight-nine months, says Nilesh Shah, MD, Kotak AMC.
By Nikunj Dalmia
Historically, the triangle has been -- markets go higher, FIIs buy and DIIs or retail participation follows. But right now, the ends of the triangle are not matching; markets are soaring and roaring, FIIs are pouring in and domestic investors are selling at record pace. We got record outflows of nearly Rs 20,000 crore in the last couple of months. What is causing this?
In March, there was record outflow by FPIs, record buying by domestic institutional investors and markets are at all-time low. If I have to choose the triangle, I will always choose March over November when markets are at all-time high. If my investors are booking profit, so be it. But definitely, the lower level will be a buyer rather than seller.
Having said that, in November like in October and September, we have seen some profit booking by our clients. We have seen redemptions by people who were in financial need. As an industry we have seen some institutional investors taking an asset allocation call. But I would like to reassure investors that this is not by selling by our fund managers to increase cash because they believe the market is expensive.
If at all, we have deployed cash balance in the market and our cash levels have remained virtually stagnant over the last eight-nine months. We are selling because our investors are putting redemptions. It is not a call on the market.
When do you see things will stabilise? Next quarter things will be choppy and it is only from the next financial year which is April 2021 that we could be in for a different change?
Mutual fund investors are not a homogenous group. They are a heterogeneous group. If I look at retail behaviour, the peak SIP flows were Rs 8,400 crore a month. The bottom SIP flow was Rs 7,800 crore a month. Now we are back to Rs 8,000 crore. By and large, retail SIP flows have sustained and there the average collection is above Rs 3,000. HNI and family office have seen some redemptions to fund other opportunities including businesses which require support during Covid-19 period.
In this balanced advantage fund category, because market valuations have moved in a certain range, the equity allocations have come down. In our own case, we would have sold close to Rs 1,200 crore of equities between June, July, August to September, October in this particular fund. This is to bring equity allocation to neutral weight from overweight in March.
We have to do profit booking because that is the mandate of the fund. If you put all these things together, we do see normalisation happening in retail flows. We do see normalisation happening in institutional flows. However, HNIs and family office space today are sitting on cash and they have to get convinced that valuations of markets have actually improved rather than deteriorated with rise in index.
Prior to September's quarterly result, many investors thought equity markets were trading at 30-35 forward PE. The September quarterly profit for Nifty 50 companies came at Rs 1,07,000 crore all-time high in corporate India’s history. If I annualised Rs 1,07,000 crore into four quarters that is Rs 4,28,000 crore on Rs 100,00,000 crore market cap of Nifty 50 that is a forward PE of 24 not 30-35.
Now the day family office, HNIs and other large investors get convinced that this Rs 1,00,000 crore quarterly run rate of profit is likely to continue, I am sure their allocation will start shifting towards equity and we will see normalcy returning in their allocation.
What will be your advice for those who are currently using the market strength to get out of some of the old investments?
Our approach has always been a disciplined asset allocator when markets are cheap; be overweight, when markets are expensive. Be underweight and invest according to your risk profile. I believe this is a great opportunity for India to convert a crisis into an opportunity.
All the catalysts for rapid economic growth -- low interest rates, high liquidity are falling in place, but banks still have to go out and lend. Foreign portfolio investment flows, foreign direct investment flows will be record highs but we also need domestic entrepreneurs to invest. Markets will rise but not all companies will rise and you will still need to pick up the right stocks.
My recommendation to an investor is do not really give too much attention to news, just follow your financial plan, markets are markets and will swing between optimism and pessimism. There will be a bull phase and a bear phase going forward also, but if you maintain your disciplined asset allocation, it will always reward you.
When we have spoken about the mutual fund industry in the past, the mutual fund industry has not gone beyond 10-12 cities. Is that trend changing?
Undoubtedly, more and more of our AUM is coming from B 30 cities and obviously change does not happen overnight. We need to gain trust and confidence of investors in B30 towns, word of mouth publicity is the most important for mutual funds.
As I create one set of satisfied customers, they will bring another set of satisfied customers and eventually this will become a chain reaction. When I started my career in mutual funds, my debt AUM was Rs 37 crore. Today it has grown to more than Rs 2,15,000 crore.
When we started our career, we had no idea. We will be managing this kind of money and this has all happened because we were able to gain investors’ trust and a J-curve eventually came into play. The J-curve has come into top cities. It is on the point of inflection in semi urban India and we have to go and build the same trust and confidence base in rural India. Eventually, the mutual fund industry will become part and parcel of every Indian citizen’s portfolio.
By Nikunj Dalmia
Historically, the triangle has been -- markets go higher, FIIs buy and DIIs or retail participation follows. But right now, the ends of the triangle are not matching; markets are soaring and roaring, FIIs are pouring in and domestic investors are selling at record pace. We got record outflows of nearly Rs 20,000 crore in the last couple of months. What is causing this?
In March, there was record outflow by FPIs, record buying by domestic institutional investors and markets are at all-time low. If I have to choose the triangle, I will always choose March over November when markets are at all-time high. If my investors are booking profit, so be it. But definitely, the lower level will be a buyer rather than seller.
Having said that, in November like in October and September, we have seen some profit booking by our clients. We have seen redemptions by people who were in financial need. As an industry we have seen some institutional investors taking an asset allocation call. But I would like to reassure investors that this is not by selling by our fund managers to increase cash because they believe the market is expensive.
If at all, we have deployed cash balance in the market and our cash levels have remained virtually stagnant over the last eight-nine months. We are selling because our investors are putting redemptions. It is not a call on the market.
When do you see things will stabilise? Next quarter things will be choppy and it is only from the next financial year which is April 2021 that we could be in for a different change?
Mutual fund investors are not a homogenous group. They are a heterogeneous group. If I look at retail behaviour, the peak SIP flows were Rs 8,400 crore a month. The bottom SIP flow was Rs 7,800 crore a month. Now we are back to Rs 8,000 crore. By and large, retail SIP flows have sustained and there the average collection is above Rs 3,000. HNI and family office have seen some redemptions to fund other opportunities including businesses which require support during Covid-19 period.
Some of the institutional investors have also done profit booking. Now there is one more element to mutual fund redemption. We also run asset allocation products like the balanced advantage fund. Now in January, we were at 40% allocation to equity. In March, it became 80% allocation to equity, today it is back to 45% allocation to equity.
In this balanced advantage fund category, because market valuations have moved in a certain range, the equity allocations have come down. In our own case, we would have sold close to Rs 1,200 crore of equities between June, July, August to September, October in this particular fund. This is to bring equity allocation to neutral weight from overweight in March.
We have to do profit booking because that is the mandate of the fund. If you put all these things together, we do see normalisation happening in retail flows. We do see normalisation happening in institutional flows. However, HNIs and family office space today are sitting on cash and they have to get convinced that valuations of markets have actually improved rather than deteriorated with rise in index.
Prior to September's quarterly result, many investors thought equity markets were trading at 30-35 forward PE. The September quarterly profit for Nifty 50 companies came at Rs 1,07,000 crore all-time high in corporate India’s history. If I annualised Rs 1,07,000 crore into four quarters that is Rs 4,28,000 crore on Rs 100,00,000 crore market cap of Nifty 50 that is a forward PE of 24 not 30-35.
Now the day family office, HNIs and other large investors get convinced that this Rs 1,00,000 crore quarterly run rate of profit is likely to continue, I am sure their allocation will start shifting towards equity and we will see normalcy returning in their allocation.
What will be your advice for those who are currently using the market strength to get out of some of the old investments?
Our approach has always been a disciplined asset allocator when markets are cheap; be overweight, when markets are expensive. Be underweight and invest according to your risk profile. I believe this is a great opportunity for India to convert a crisis into an opportunity.
All the catalysts for rapid economic growth -- low interest rates, high liquidity are falling in place, but banks still have to go out and lend. Foreign portfolio investment flows, foreign direct investment flows will be record highs but we also need domestic entrepreneurs to invest. Markets will rise but not all companies will rise and you will still need to pick up the right stocks.
My recommendation to an investor is do not really give too much attention to news, just follow your financial plan, markets are markets and will swing between optimism and pessimism. There will be a bull phase and a bear phase going forward also, but if you maintain your disciplined asset allocation, it will always reward you.
When we have spoken about the mutual fund industry in the past, the mutual fund industry has not gone beyond 10-12 cities. Is that trend changing?
Undoubtedly, more and more of our AUM is coming from B 30 cities and obviously change does not happen overnight. We need to gain trust and confidence of investors in B30 towns, word of mouth publicity is the most important for mutual funds.
As I create one set of satisfied customers, they will bring another set of satisfied customers and eventually this will become a chain reaction. When I started my career in mutual funds, my debt AUM was Rs 37 crore. Today it has grown to more than Rs 2,15,000 crore.
When we started our career, we had no idea. We will be managing this kind of money and this has all happened because we were able to gain investors’ trust and a J-curve eventually came into play. The J-curve has come into top cities. It is on the point of inflection in semi urban India and we have to go and build the same trust and confidence base in rural India. Eventually, the mutual fund industry will become part and parcel of every Indian citizen’s portfolio.
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