Segregate debt mutual funds investments into three buckets: Vishal Kapoor, IDFC AMC

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While low interest rates can be a positive for equity investors, fixed income investors have to get used to the idea of lower returns for some time to come, Vishal Kapoor CEO, IDFC AMC tells ET Wealth.

What is your assessment of the current market scenario after the rebound of last six months?
The sharp rebound in equities has primarily been driven by liquidity from the large fiscal stimulus packages announced by governments, and an accommodative monetary policy stance taken by central banks. Going forward, we expect the pace of normalisation to be proportional to economic growth. The advent of an effective vaccine against Covid or a full cure should hasten this process. However, earnings are key for sustained returns over longer periods. This financial year offers a low base for future earnings growth. Over the next three to five years we expect to see robust earnings growth.

A correction is also a feature of any uptrend. From April 2020 onwards, we have seen a steady market up-move, with only one early correction. Investors should expect further corrections as well, and the sooner it happens, the healthier it may be as it would help unwind any excesses. Investors can use it to their advantage.

Finally, the next couple of years may experience the extension of the current monetary stance along with a similarly ferocious fiscal stimuli announced by governments the world over. Such a scenario could lead to higher asset prices and inflation, rising G-sec yields, rising gold prices or currency volatility. None of these outcomes may be severely negative for equities as an asset class.

How will the low interest rate scenario impact returns across equity and debt?
Unlike the 2008 crisis, most governments have backed up monetary policy with fiscal spending. This should limit the demand destruction caused by the pandemic. A low interest rate, therefore, should be a positive for an equity investor. However, a ‘lower for longer’ rate scenario means that a fixed income investor has to make peace with lower returns for some time. While today, past returns on debt portfolios may look attractive due to the impact of falling interest rates on portfolio gains, this is not likely to be sustained in the near future. Given that the full nature of the impact of this crisis is still evolving, we believe that for debt investments, our focus has to be on capital preservation through the best quality sovereign investments.

How do you view the recent trend of investors shifting towards direct equities?
Mutual funds through their various active and passive offerings continue to provide retail investors with a great package for market participation, with a well-established long term track record. Direct equity investments require time, expertise and monitoring which can be challenging for most individual investors.

Do you feel the new riskometer guidelines are comprehensive enough to help investors gauge risks in funds?
The new riskometer guidelines provide a detailed, consistent framework for quantitative risk measurement. It will also now be dynamic, being required to be refreshed on a monthly basis. This means that with fund portfolio changes, fund risk labels may change more frequently. Communication requirements will help create a more open, transparent and aware environment for risk measurement, especially in debt mutual funds. We, therefore, see this move providing greater transparency and clarity, and should aide in better decision making.

How do you plan to position IDFC Multi Cap amid the revised guidelines?
The IDFC Multi Cap Fund has traditionally held a well-diversified market cap stance, with almost 45% currently allocated to mid and small caps as against the revised guidelines which mandate a minimum of 50%. The fund is, therefore, better placed to align to the required guidelines as compared to the multi cap category average. We understand that various representations have been made for modifications to the guidelines. We will await further clarity in this regard.

Do you feel enough safeguards are in place now to make debt funds safer?
Over the past few years, we have seen quite a few positive regulatory mandates for debt funds. These steps provide greater clarity and help in decision-making. The industry is discussing further measures that can help transparency, improve liquidity as well as the resolution of issues pertaining to defaults or unwinding portfolios. Having said this, we must also recognise the risk inherent in certain debt strategies, which can be proactively managed but not eliminated.

How have events of past 12-18 months shaped your approach in the debt funds segment?
We have been highlighting the importance of an allocation framework in debt fund investing, which can help identify and manage risk in an investor’s debt portfolio. Our three-lens framework segregates all our debt funds into three buckets: Liquidity, Core and Satellite. The Liquidity allocation is meant for very short term parking of surpluses, or maintaining an emergency corpus. The Core allocation should ideally form the bulk of an investor’s debt allocation, with funds that focus on high credit quality and low to moderate maturity profile matched to the horizon. The Satellite bucket has funds that can take higher risk . Within these buckets, we have different offerings with varying minimum horizons that can aide decision making.

Banking & PSU and corporate bond funds seem to be favourites among investors. Are they good for parking money for next three years?
Fund selection should be based on investor’s specific needs, risk appetite and horizon. The IDFC Banking and PSU Debt Fund and IDFC Corporate Bond Fund invest in high quality instruments and are currently following a roll-down approach. These funds can form a part of Core allocation.