What kind of opportunity do you think demonetization has opened? Is it as big as being talked about? Will it be a gradual opening up?
Demonetization has impacted finance industry in multiple ways. Importantly, inflow in banking system has increased, part of it would be sticky and remain in the banking system. It is a direct result of two factors - (i) new customers who have started depositing money in banks ; (ii) existing customers who have stated dealing more through banking system resulting into their savings being directly deposited into banks.
Historically, households have preferred bank FDs as their primary mode of savings. However, in the existing low interest rate regime, this interest income is not standing to the expectations of investors. Existing household credits with bank are to the tune of Rs 45 trillion approximately, which is the domain of opportunity as such. Demonetization will lead to a digital transaction economy. That will lead to conversion of black to white economy. Mainly, it will lead to audit tax trail in the banking system. So, tax violators will bring into the income tax surveillance and it leads to widening tax bracket.
How do you think AMCs can reach out to more people (beyond the institutions), to really make a mark with the paradigm change that demonetization can bring?
We have been trying hard to convince retail investors about the benefits of mutual funds and how investors can integrate mutual funds in their investment process. As an AMC, we have enabled digital transactions; many AMCs have also enabled investing through apps, etc. As the economy and investors are embracing digitization, we are also gearing up for the change. A good percentage of cash bank deposits may be channelled into financial asset investments like mutual fund and life insurance products. My analysis indicates that the MF industry is likely to get higher inflow in medium to long term point of view.
What opportunity does it bring up for retail investors vis-a-vis other fixed income?
Some percentage of SME/ business entrepreneurs will convert parallel economy into white economy. Mutual fund industry will benefit from that conversion. A good percentage of financial assets will be channelled towards fixed income as well as equity MF products.
There have been some innovations around debt products to make them more eye catching for investors. Cards have been linked, instant redemptions, use of UPI interface use, etc. What are the major reasons debt products have still not made a major mark in the minds of retail investors? Also, what could be the solutions to address these problems?
The biggest problem for low retail participation in debt products is lack of knowledge about debt products. Simple concept of how yield and price are inversely related Is also unknown to common man. Another major problem that exist with debt products unlike equity markets is the ticket size of investment. One can invest in one share of any stock whereas in debt market one lot consist of 5 crores. This is why we can see lot of retail investors investing directly in the equity market unlike debt market
The solution is to educate the common man about debt products and how the debt market works. People also need to be educated about the benefits of liquid funds as compared to savings accounts, advantages of bond fund and balanced funds as compared to fixed deposits.
We also need a lot of ETF products in debt market which would allow investors to invest via exchange and provide enough liquidity for investors. Currently, we have a lot of equity ETF but in debt we don't have any. In fact, LIC MF is the first mutual fund to come out with GSec ETF.
Do you think the use of jargons like 'duration', 'short-end of the curve', 'yield to maturity', etc. are partly responsible for the confusion and lack of interest among retail investors as far as debt funds are concerned? What can be done to simplify these terms?
I don't think so. Retail investors need to be educated on the risk and return of debt MF products. Data like duration, yield to maturity explains in depth about the risk as well as the return/capital appreciation in the debt MF products. The interest rate movement, credit spread plays a role for the debt MF scheme's NAV. The interest rate movement, credit spread is linked to Government of India's macro, micro policy measures, economy recovery, fiscal deficit management, currency rate movement, etc. The RBI plays an important role in retail inflation, currency stability and in turn the interest rate movement. The fund managers manage the MF schemes based on the expectation of Union Government policies, global macro development, RBI's measures.
There was a lot of hope that RBI will cut rates in last policy meet. After that surprising 'pause' in RBI policy, do you expect further rate cuts? How much?
RBI would wait and take a breather. Globally, there are multiple changes in macro variables. Today's fed rate hike would alter global equations regarding currencies and capital flows. We believe, RBI would take time to assess the situation before choosing or altering current direction. Due to demonetization, the liquidity in the Indian financial system has increased substantially and that lead to softening of interest rates. Since, the US-FOMC is likely to raise the Fed rate, we may not see major gilt price appreciation in the short to medium term. In addition, OPEC and major non-OPEC oil producing countries like Russia are cutting down the crude production. In the last few weeks, we had witnessed 18 % to 20 % crude oil price hike in the global energy market. Since India imports 85% of crude, the raise in the global market will make a major impact on India's fiscal deficit as well as raise the retail CPI. Considering above macro economy factors, the RBI may not reduce the repo aggressively, going forward.
Gilt funds saw massive gains recently. Which type of debt funds should investors put in money now - for short term, medium term and long term?
Gilt funds had rallied mainly due demonetization measures. Due to factors that was discussed in earlier question & answer, investors who are willing to take less risk, may consider investing in debt short term funds or ultra short term funds. Investors who have moderate risk appetite, may consider investing in duration funds like bond funds and credit opportunities funds.
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