The industry has had one of its best years in terms of asset accretion. We have noticed a move pointing to a structural shift in the ownership of financial assets, and mutual funds have been its collateral beneficiaries. The allocation of long-term investments in capital markets through SIPs is a pertinent change that has been observed during the year. As witnessed over various market cycles, retail participation follows past performance and has an inherently higher timing risk. It is getting mitigated due to periodic investment patterns and distribution efforts towards encouraging SIP books and building up the hybrid-fund category.
As a fund house, we are very much in the initial stage of building up our product and distribution baskets and with continuing our endeavour to deliver simple products that remain relevant and retain long-term trust of retail investors.
Managing return expectations
While high returns over a two to three year period is not unheard of and is very much desirable, what is discomforting is the fact that in recent times, high equity returns have accrued to the investor at reasonably low volatility. This causes some worry that investors may start considering equity as a low-risk investment avenue and, therefore, channel in money with a short-term investment horizons.
In all our communications to investors, we try to stress that the recent low volatility may not continue in future and they can see negative returns for brief periods. Though over a longer-term period, the impact of such volatility will dissipate.
We believe that judging valuations at the index level based on historical levels is misleading as the index composition keeps changing over time. Also, the index is subject to survivorship bias, wherein high performing, top quality companies trading at premium valuations replace the underperformers on a regular basis. However, having said that, there is no doubt that valuations in some pockets, particularly in the mid and small-cap category, have become extreme and are a cause of concern. We consciously try to avoid such themes in the portfolio. Further, we like to buy into businesses that are run by competent management teams and have quality products/services to offer in a sector that has good economics. This kind of investing should ensure a natural downside protection in volatile markets.
Rising industry assets
Rising assets create challenges for fund managers who have to constantly look out for avenues to invest such liquidity. The challenge intensifies when valuations are prohibitive.
Growing clout of domestic funds vis-a-vis FIIs
We have seen good flows into the domestic mutual fund industry, which has helped absorb substantial selling by the FIIs, which in earlier times would have caused significant volatility in the markets.
Outlook for equity and debt
Equities are an investment vehicle for long-term wealth creation and debt is an investment vehicle for wealth preservation.
We have no doubt that India is currently in a phase of structural transformation that is going to result in long-term positive changes to the economy. These changes may take time to reflect in corporate earnings. We are very enthusiastic about equity as an asset class.
We expect bond yields to harden globally over a period of time as the world bounces back to the growth mode. However, we believe, Indian bonds will attract reasonable interest as the Indian economy improves and hence Indian yields should not rise much.