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Consider SIP/STP into value, focused, dividend yield or small cap funds: S Naren

The Covid-19 pandemic shows no signs of vanishing; the much-awaited economic package from the government hasn’t cheered the market. d the market. Add to that the predictions of more lockdowns and economic disruptions. We reached out to S Naren, Executive Director & CIO of ICICI Prudential MF, to make sense of these trying times.

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Last Updated: May 22, 2020, 12.44 PM IST
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ET Online
s naren
Mutual fund investors are extremely nervous about the current state of affairs. The Covid-19 pandemic shows no signs of vanishing; the much-awaited economic package from the government hasn’t cheered the market. Add to that the predictions of more lockdowns and economic disruptions. Shivani Bazaz of ETMutualFunds.com reached out to S Naren, Executive Director & CIO of ICICI Prudential MF, to make sense of these trying times. Naren, known for keeping a cool head in chaotic situations in the market, offers three special tips to investors to traverse the current situation. Read the edited interview.

Finally, the prime minister has announced an economic package to deal with the economic disruption caused by the Covid-19 pandemic. What is your quick take on the package and will it be enough to tackle the issues?
The package aimed at MSMEs is very helpful. We believe an economic package coupled with a monetary package is the best way to deal with the current disruption. Today’s monetary policy is a step in the right direction. Recent measures taken in terms of resuming airline services, allowing limited number of trains to operate and permitting more economic activities, are all measures which are likely to have a positive impact. We hope that as the various economic activities recommence over the next few weeks, there is no major spike in the number of cases reported. It is only then we can be sure that we are on the road to recovery.

Mutual fund investors are facing a crisis of confidence. Equity investors are nervous about their investments because of Covid-19 pandemic and a nationwide lockdown. The recent developments in the debt mutual funds are adding to their woes. What would you tell these investors?

When it comes to equity investments, markets are likely to be volatile owing to the uncertainty related to the Coronavirus pandemic. No one knows how long the current situation may continue, the full impact of the economic fallout etc. So, in the near term, it is best for equity investors to expect that markets are likely to remain volatile. Investors can consider products like asset allocation funds which are dynamically managed which can help an investor to make the most of even such challenging times and continue with SIPs.

When it comes to the debt market, it is important to understand that the developments are largely isolated to a single fund house. The issue is not a systemic one. Shunning an asset class just because there has been a negative development in a certain fund house may not be a wise move. This is especially at a time when debt markets are offering such attractive investment opportunities from a short to medium term perspective.

How bleak is the economic scenario. The economic devastation due to the coronavirus pandemic is well documented. How severe is it going to be in the coming months? When do you see things settling down and a possible revival in economic activities?
Coronavirus is a medical pandemic and not an economic issue. Hence, it is difficult for finance professionals or economists to predict how the economic scenario will play out subsequently. We believe that as and when the medical issue gets addressed, the economic issue too will settle.

The banking system is awash with liquidity to the tune of Rs 8 lakh crore. If this continues, then it is a clear sign that economic disruption too will continue. What is currently desirable is a lower systemic surplus which signifies that credit growth has started to normalise.

Many investors seem to believe that the pent-up demand would spur economic activity once the lockdown is over. How realistic is this assumption?
There would be some amount of pent up demand in specific goods once the lockdown is over. At the same time, we have to be aware that many individuals’ income stream has been affected due to lockdown. So, the likely pent-up demand will be visible only in those areas whose consumer’s wealth profile has not been affected.

Senior fund managers like you have been asking investors to proceed with utmost caution, but many investors seem to believe that the market is likely to bounce back immediately. Many new investors are eager to invest equity schemes. What would you tell these adventurous investors?

Given the lack of clarity in terms of the economic impact of Coronavirus, it is better to adopt a cautious approach to investing, especially in equities given that equity is not a risk-free asset class. An aggressive investment in the current market would mean that the investor believes that Coronavirus is getting resolved in a smooth manner pan India in the short run.

Existing investors are looking at the market with trepidation. They cannot understand the frequent four-digit upward and downward movements in the market. How would you decode the market for them?
We continue to believe that markets are likely to remain volatile. As a result, asset allocation remains the optimal way of investing. The zero interest rate scenario existing in various developed countries along with the prevailing economic environment domestically suggests that volatility is likely to prevail. At such times categories such as balanced advantage/dynamic asset allocation schemes prove to be the optimal way to approach equity investing in the prevailing market conditions.

Many market analysts believe that we are going to witness one more round of liquidity-driven market. Last time, only a few stocks benefited from various rallies, and most mutual fund investors did not make any money. Will things be different this time?
An investor who had exposure to debt funds and had focused on asset allocation has actually benefited from market volatility. However, investors who chose to solely invest into equities that too, not systematically, are the ones who have suboptimal investor experience.

You are known for your timely allocation calls. Would you recommend extra allocations to equity if an investor has surplus cash? If yes, what should they keep in mind?
Given the deflationary environment, an extra allocation can be made into debt funds, especially short and medium term schemes and asset allocation schemes, since such funds stand to gain from market volatility, from both equity and debt allocation.

The trigger for equities now is Coronavirus. We are of the view that markets are likely to regain some of its lost sheen as soon the pandemic problem is solved. So, investors who are allocating extra sums to equities currently should be mindful of this fact. One can consider initiating SIP/STP into value, focused, dividend yield or small cap category of funds. Among thematic/sectoral ones, we are positive on India opportunities, exports and infrastructure.

You are a great fan of erstwhile balanced schemes - now classified as aggressive hybrid schemes. Traditional investors in these funds are extremely anxious about these schemes. How do you view the scenario?
We have been positive on the entire hybrid categories of schemes - Conservative Hybrid Fund, Aggressive Hybrid Fund, Balanced Advantage, Multi Asset Allocation and Equity Savings. Based on the risk appetite, an investor can choose any of the products available. The current situation is largely due to the outbreak of the pandemic and the correction seen thereafter has been very sharp. Despite that sharp downturn, hybrid funds were successful in limiting the downside and have thus far aided in delivering relatively better investor experience when compared to equity schemes. We continue to believe over a complete market cycle, hybrid funds are likely to be well placed.

Any special advice to our readers to traverse the current scenario?
There are three points which investors should be mindful of:

1) Maintaining the asset allocation discipline is of utmost importance, irrespective of the market conditions.

2) Do not let short-term developments impact long-term commitments. This is especially applicable in terms of SIPs. In a market downturn, investors tend to keep away from systematic investing, hoping to return when the market stabilises. This effectively means that the investor has lost the opportunity to accumulate more units at a lower cost, thereby missing out on the potential gains to be made from a complete market cycle.

3) Do not ignore debt investments: Post the recent debacle in the debt market, many of the investors are having second thoughts about investing into debt schemes. The point to remember here is that debt as an asset class has a definitive role to play in an investment portfolio. In deflationary times, debt investments tend to do well. For example: Over the past one year, investments across debt categories have delivered robust returns while the return from equity has not been very encouraging.

Which are the pockets of opportunities in the debt fund market currently?
We believe both the duration and credit offers attractive investment opportunities. Given that the yield curve continues to remain steep due to high risk aversion, the short and medium segment of the yield curve is very attractive, as they provide good risk reward benefit. As a result, one can invest into products such as short, medium duration funds. When it comes to credit, the space remains attractive due to valuation comfort owing to the high spread between accrual schemes and repo, which provides a good margin of safety for investments made.

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