Suresh Soni, Chief Executive at DHFL Pramerica Mutual Fund, is a passive investor who is currently investing in large-cap stocks without worrying whether the markets are going up or down. In a conversation with Business Today, Soni says he does not invest in gold or real estate and would prefer fixed-income investments as a persification tool, which would also complement his equity investments. He has, however, made significant investments in his mutual fund (MF) during the past one year to strengthen its equity platform. Of late, the MF industry has shown an impressive growth, but Soni thinks it still has a long way to go. Edited excerpts:
What has been the big change in the mutual fund industry over the past couple of years?
Over the past few years, we have witnessed increased investor interest in mutual funds. The industry's assets under management (AUM) had crossed Rs 10 lakh crore for the first time in May 2014, and within a short span of three years, the AUM size has doubled. The growth has been impressive, but what is most satisfying is that the growth has been triggered by increasing retail interest. Around 1.45 crore investors currently invest through systematic investment plans, setting aside a small sum every month. Overall, the number of retail accounts (folios) has now touched six crore. These developments are healthy and augur well not only for the MF industry but also for the growth of capital markets.
For a long time, a life insurance policy has been the default investment choice for households. As more Indian households learn about mutual funds and the onboarding process becomes simpler, we believe the investor base can multiply manifold in the coming decade.
How different is DHFL Pramerica in terms of investment, marketing and sales? Have you changed the way it operates since you have taken over the AMC?
Its current portfolio has a suite of well-performing equity and fixed-income funds with a long vintage. Plus, we have a unique equity PMS (portfolio management service) proposition that has seen significant interest. A large chunk of our asset base is in fixed-income products. In the current environment of asset quality concerns, we put special emphasis on the credit quality of portfolios and have enhanced our credit-monitoring process. While our fixed-income platform continues to perform strongly, we have made significant investments over the past one year to strengthen our equity platform. These include investing in the research team, adding more fund managers, enhancement of internal processes, and providing a clear product framework as well as review mechanism.
We have also taken some steps to engage better with our clients and distribution partners. Our number of branches has gone up from 10 last year to 23 this year. We have added resources to our coverage team and enhanced the service delivery platform. In fact, we keep on investing in a number of areas to ensure that our overall proposition to customers, both in terms of investment performance and service delivery, would remain on a par with or above the industry standards. We will also come up with a host of marketing initiatives. We are investing in building this platform for scaling up significantly in the years to come. Both promoter and shareholders have a deep-rooted retail culture here, and they are committed to growing this market segment.
Why are you wary of the IPO market, mid-cap and small-cap stocks? Is it due to the sheer euphoria one sees in large-scale investor participation?
First of all, I don't think our equity market, on the whole, appears euphoric. Understandably, as indices cross a new milestone, people wonder if the markets have peaked.
Markets are more like a highway than a mountain. On a highway, there are no peaks but only milestones. Every milestone will be followed by the next milestone unless you believe that India will not grow anymore.
However, there are some pockets where there is a need for caution. For example, we have recently seen huge oversubscription in some lesser-known initial public offerings (IPOs) and SME IPOs. It only shows there is a fair amount of money sitting on the sidelines and looking for cheap entry into the equity market. An IPO is seen by some people as a discount sale; hence, the huge oversubscription. I think investors would do well to invest this surplus systematically in equity MFs.
As for mid caps and small caps, after 26 per cent and 29 per cent compound annual growth rate (CAGR) versus 13 per cent CAGR of Nifty over the past three years and a half, the valuations of mid and small caps are at a significant premium compared to large caps. Investors would do well to moderate their returns expectations from this segment.
With the index P/E trading above the average, what is your advice to investors and your fund managers?
I agree that the market P/E is at a premium to the historical average, but there are several factors based on which the broad market valuations appear reasonable. When you view the performance of the Indian markets in the context of other equity markets and other asset classes, the rise appears quite reasonable.
Also, the government is implementing key reforms such as the Goods and Services Tax and the Bankruptcy Code. And there is a good monsoon this year, adding the necessary impetus to economic growth. So, there could be a revival in corporate profits while the falling interest rates also support the case for equities. Of course, valuations appear a tad expensive, but the overall medium-term outlook remains strong.
At any stage of the market, our fund managers look for relative value within the mandated space. In a rising market, the task of finding value becomes slightly more difficult. Moreover, it is equally important to avoid the segments that appear overvalued.
I would urge investors to take a long-term view on their investments in equity MFs. We give 15 years to public provident fund investments, 15-20 year to our insurance policies. So, make a long-term commitment to equity investing too. Equity markets are volatile in the short term, and it is something we can't wish away. We probably achieve precious little by tracking and worrying about the markets daily. Keep it simple, invest in good funds, stick to asset allocation and give your investments time to perform.
Fixed-income investment has been close to your heart. Why so and where will you advise investors to park their money?
Thanks to the low-inflation environment, the real returns on fixed-income funds have become quite attractive. Even though headline rates have fallen, real interest rates have reached their highest level seen over the past decade. Also, debt mutual funds offer an amazing range of products that could meet every need of the investors. Most fixed-income schemes are fairly liquid and able to meet redemption requests on a day-to-day basis while banks and corporate fixed deposits (FDs) have lock-in periods.
Fixed income schemes also mean significantly lower taxation. People invested in these schemes for three years or more can benefit from lower taxation under long-term capital gain. It can bring down the taxation to 10-15 per cent, thus yielding much better post-tax returns for investors in higher tax brackets.
While equities get talked about a lot, I would always recommend investing in some fixed-income funds for creating a non-volatile earning stream to meet your short-term needs. For investors who have the ability to set aside the money for a few years, I would recommend credit opportunities funds. We have seen our fund managers doing a fairly good job of managing credits over the years. As for investors with a shorter time horizon, ultra-short-term funds could be a good option compared to traditional bank FDs.
Will you be an investor in gold and real estate when the equity asset class is in favour?
Over the past few years, a few factors have adversely impacted the attractions of gold and real estate.
Indians have been one of the biggest buyers of gold and have an unshakable confidence in it. Over the long term, gold has delivered more than bank deposits. But nearly half of the long-term returns are due to the depreciation of rupee. As rupee has remained steady over the past three years and international gold prices have been flat, local prices have come down.
Real estate prices have been soft for the past few years. The relative attraction of investment has declined with the recent changes in taxation, where an empty property is taxed as "deemed let out".
I would favour financial assets over physical assets. However, I understand the merit of persification and would consider fixed-income investments to complement my equity investments.
Where are you investing your money?
I like to invest my money in the AMC I am working with. So, much of my portfolio is with DHFL Pramerica. As I can withstand some volatility, I have invested the bulk of my money in equity funds. But then, I am a passive investor in equities. I don't try to second-guess when markets will rise or fall. Right now, my portfolio is tilted towards large-cap stocks, mainly through the DHFL Pramerica Large Cap Fund. From a valuation standpoint, large caps are trading at a discount compared to mid- and small-caps, despite the former's stronger business profiles. That is the one call I do take in equities, that of relative valuations. It is inefficient to try and time the market in debt funds. You also end up paying capital gains tax if you hold it for less than three years. So my medium-term allocation is for credit opportunities funds and the rest is in short-term funds.