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'Days of 8-9% return from liquid funds are over'

Here are the edited excerpts from Dhirendra Kumar's chat with ET Now

'Days of 8-9% return from liquid funds are over'

In a conversation with ET Now, Dhirendra Kumar says that the returns from fixed income should always be pegged to what inflation expectations are. He believes that a diversified fixed income portfolio which is able to beat inflation by about 10-15% should be good enough.

Edited excerpts:

It is said that in 2016 each and every poll was wrong and in 2017 the way fund managers are betting on RBI's next move, it may just be a repeat. After getting Brexit wrong, Trump victory wrong, now they have got the RBI move wrong as well. How could they get it so wrong?
They have been wrong on a couple of occasions in the recent past. It was a change of regime at the central bank and people are still in their old frame of mind that they look at numbers and anticipate continuation of a trend. Whenever there is a reversal they get it wrong. Of course, I am not referring to surprise that we got two, two and a half years ago but on most other occasions, the most important thing is should the investor worry about who is guessing RBI's move right? The fixed income investment that an investor makes is supposed to be a very simple part of your portfolio. If you do not make 9.5% but end up making 8.75% by not anticipating, that is good enough. That is what the investor is expecting. You are basically looking at a stable and predictable return and you are not looking at such blow ups in the interim.

From that standpoint, investors need to de-risk themselves from the stories they are being told because the mutual fund industry has gone about innovating beyond a point which cannot be sustained and logically explained. They go about creating a story and then it gets a life of its own. This should not be allowed, investor should keep it very simple. Keep money for a few days or weeks in a liquid fund. Keep money for a few months in a conservative short-term debt fund which has a track record of not doing anything complicated.

Likewise, for the debt fund and most other categories, most investors can leave because they were launched at some other point to strike a chord with the investor who was otherwise not listening. So, it is basically an unproductive effort in the garb of innovation.

Let us be real. When you are nearing the end of a rate cut cycle, big gains from debt funds are unlikely. In the last couple of years, debt fund managers got their positioning right. Now that the best of the rate cut is behind us on a three-year basis, on a 24-month basis what should be the average return expectation? Should we bring it down from double digit to single digit?
Return from fixed income should always be pegged to what inflation expectation is and my understanding of a combination of a portfolio, a diversified fixed income portfolio should be able to match inflation or should be able to beat inflation by about 10-15% which could be good enough.

From that standpoint, 7-8% return is possible from a diversified income fund. If the fund manager is not doing anything complicated and does not get it wrong, that should be the return expectation. What we have gotten used to is 8-9% return from liquid funds. That is definitely behind us.

We can have those kind of expectations only from income fund and tentatively from the best performing ones. But I would urge investors to err on the side of caution. They should be conservative with their selection, should not get carried away by the great numbers that you see of in the recent past, be with the fund which has been more consistent because that is what your primary expectation from a fixed income fund is and it should not be looked down upon based on past performance.

You have been pretty critical of the fund managers for selling fixed income products until now not as a capital protection product which they are inherently supposed to be but as a capital appreciation product. What can fund managers do here in order to not push away investors who are perhaps watching us and wanting to know what is going to happen to their investments post the carnage that has played out on 8th and 9th Feb?
They should just give up over engineering the debt fund. It is a very simple product. It fulfils the very important need of an investor. Do not complicate it. Just have three-four funds, run these with rigor and investors will be happy for not complicating their lives by providing too many options.

Today there are about 15 to 18 kind of variety of debt funds available. You have the floater long term. We do not have many of those underlying instruments based on which some of these funds are mounted. Look at the nomenclature, look at the credit opportunity that long term, short term guilt, the variation that is possible and I find it very hard. I actually analyse mutual fund for a living and I find it extremely difficult to classify funds in a very logical fashion and sometimes when I have succeeded to do it, in six months time it all becomes redundant because the funds have changed their colours. So what is a point of this whole exercise?
One should look at these funds from an investor's perspective, their needs. Beyond one or two opportunistic category, these funds should be very dull and boring and investors should buy them for very different purpose and definitely not for great returns.

Great returns can be found in other parts of the market and can be offered by all kind of mutual funds. So make the fixed income funds dull and boring funds which investors buy for very logical reason.

Any investor works with a goal in mind. You invest money for a few days or for a few months or for a few years. For different goals that you may have as an investor, what are the best suited fixed income products right now?
In order to buy liquid funds, you do not need my recommendations. You just need to look for the lowest expense and buy it and the best performing fund and the not so great and the average fund, the difference will not be much.

Also look for convenience. Look at the DSP BlackRock or Birla Sun Life which offer apps. You get your redemption up to Rs 2.5 lakh in half an hour time, so you can move the money from your bank to this liquid fund and get it back in half an hour's time. This is a great innovation. It should be brought for simplicity and convenience and optimising your return a little bit.

So, go ahead and choose liquid funds for your own convenience. Even if you settle for 25 bps less, it does not matter.

Among conservative short term funds, I have listed some -- the JM Floater Long Term Fund or the Taurus Ultra Short-Term Bond Fund or L&T Floating Rate Fund or Principal Bank CD. I find these conservative. They have not been adventurous. Likewise, the conservative income funds which I find have been able to withstand the whole turbulence. They also have reasonable long-term performance as well and they were the least hit and showed great resilience through this turmoil.

Invesco India Medium Term Fund, Kotak Corporate Bond Fund -- the standard plan, Franklin India Income Builder Fund and HDFC Medium Term Opportunity Fund are the most resilient and investors should err on the side of caution. Go for conservative fixed income funds.

Let us talk about balanced funds in a falling equity market. They tend to give you that extra cushion. In a rising equity market when bond yields are unlikely to fall, may be this time the equity component will give you that extra kicker. So stick to balanced funds and stick to the good two-three names?
Yes, absolutely. If somebody is a long-term investor and is very disappointed with and cannot really withstand the volatility of 100% equity funds, then balanced fund proves to be the best choice. Not only that, even for mature seasoned investors who have been used to equity, we have not seen the most turbulent of times and balanced funds are likely to be the biggest beneficiary of that because the active daily rebalancing by the fund manager is providing you a very different kind of vehicle.

Let me also caution you that most of the balanced funds have actually been fairly unbalanced. Most of these balanced funds which we refer to by their name are 75% into equity. Because of the tax glitch that our tax laws allows, only funds with over 65% allocation to equity, get the tax treatment of an equity fund. That is why the lure of getting that tax break of holding of one year and making your gains completely tax free has driven funds to up to 75%.

Go for the more conservative ones -- the balanced advantage which are able to maintain a 50-50 kind of allocation with their derivative position and also retain the equity flavour or equity tax treatment.

The funds which I like are quite a few, the balanced fund of the older kind Franklin Balanced or Reliance Balanced I like. The balanced advantage I have been increasingly being impressed by this balanced advantage of ICICI Prudential which maintains the over 50% allocation to equity yet maintains it legal character of a equity fund.

Source: Economic Times