Probability of negative returns declines in long run: Crisil’s Bhushan Kedar

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Published: September 27, 2019 7:14:58 AM

Analysis of data shows that individual investors continued to invest largely through the regular plan route (distributors) at 83% of their AUM compared with just 31% for institutional route.

Bhushan Kedar, director, Funds & Fixed Income, Crisil (Portrait: Shyam Kumar Prasad)Bhushan Kedar, director, Funds & Fixed Income, Crisil (Portrait: Shyam Kumar Prasad)

Inflows through systematic investment plans (SIPs) in equity-oriented mutual funds have surged despite market volatility. Bhushan Kedar, director, Funds & Fixed Income, Crisil, in an interview to Saikat Neogi says the probability of negative returns declines as the investment horizon increases. Excerpts:

Despite market volatility, SIPs continue to see traction. Are investors looking at long-term gains from equities and overcoming behavioural weakness?
SIP is an important investment strategy/discipline and is very useful in wealth creation and risk reduction over a longer investing horizon. In fact, SIP in equity-oriented mutual funds surged despite frequent bouts of market turbulence, indicating awareness among investors that this route can help them sidestep the behavioural weakness that emerges during volatile market phases. An analysis of CRISIL Equity Fund Performance Index over the past 15 years to June 2019 show that the probability of negative returns declines as the investment horizon increases. Difference between the minimum and maximum SIP returns also narrows with increase in investment horizon.

Further, investing through SIPs over the longer term can significantly increase the amount of wealth creation. An analysis of various equity categories shows that returns, and the subsequent wealth creation, improve in line with an increase in the investment horizon. Finance theory calls this the compounding effect—longer duration allows your money to multiply. Monthly SIP numbers, which remain robust despite market downturn, show matured investor behaviour.

Monthly SIP has crossed the Rs 8,000-crore mark with a contribution of Rs 1 trillion a year to the mutual fund industry.

Liquid funds have gained in terms of AUM in August. Has investor confidence returned in liquid funds after a spate of defaults? Have credit worries subsided?
Money flow into liquid funds in the second and third months of a quarter is cyclical. On the other hand, the category sees outflows in the last month of any quarter as banks and corporates remove money for advance tax payment requirements. Meanwhile, Sebi’s move to reduce the amortisation threshold to 30 days and proposal to full mark-to-market (MTM) coupled with the requirement of minimum 20% investment in cash, receivables and government securities (G-secs) is expected to improve the category’s liquidity.

The full MTM model coupled with changes in the investment pattern could see a dip in liquid funds’ returns, which would steepen the yield curve in the debt market spectrum. CRISIL’s analysis, however, shows that a recalibration of the portfolio to share of less than 30-day maturity securities to more than 30-day maturity in a ratio of 60:40 is expected to provide similar volatility and returns as that provided currently by the category across the investment horizon spectrum. Notwithstanding this, in case there is a sharper dip in returns from the category, some investors with a high-risk appetite might look at rebalancing their portfolios to higher-yield, higher-risk categories such as ultra-short and money market funds, which have slightly higher maturity than liquid funds, or to overnight funds in the lower investment horizon, which carry the least interest rate risk.

Are individual investors preferring to invest in direct plans or do they still prefer hand-holding by distributors?
Analysis of data shows that individual investors continued to invest largely through the regular plan route (distributors) at 83% of their AUM compared with just 31% for institutional route. This showcases their preference for hand-holding by distributors. Further, with a large populace of the country still not exposed to mutual funds, distributors and regular plans will continue to play a major role in individual investor investments in the industry.

In case of default in debt fund by companies, should the losses remain a pass through?
Mutual funds do not provide guaranteed returns. Their returns depend on the performance of their investments. The structure of mutual funds supports pass through mechanism of both profits and losses to the investor, but an asset management company (AMC) on its own can take a decision to own the losses.

Investor is also assumed to understand the risk of investment in mutual funds. Given the recent credit events, the regulator has tightened investment framework for AMCs to prevent such events. However, the risk will always lie with the investor in terms of selecting right funds given his/her risk appetite.

How is digitalisation helping to creating awareness of mutual funds?
Adoption of technology in the digital payments sphere has aided the rapid influx of digital money into the industry. The share of digital gross inflows grew from 0.5% three years back to nearly 1/5th of gross flows by end-fiscal 2018, given the growing smartphone and internet penetration in the hinterland. Inflows through the physical route have been gradually declining. Clearly, the role of technology can only grow and the digital mode is the way forward for the industry, intermediaries and investors.

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