January 22, 2015 11:52 pm | Financial Express

Despite equity markets touching new high valuations of many stocks turning expensive, A Balasubramanian, CEO, Birla Sun Life Asset Management Company (AMC) says that one should stay invested in equities and even conservative investors should have some exposure to equity mutual funds. In an interview with Chirag Madia, Balasubramanian also says India will enter a lower interest rate regime driven largely by falling inflation and fiscal consolidation. Excerpts:

We saw a surprise cut in interest rates recently by the Reserve Bank of India (RBI). What is your outlook on debt market? Do you think we may see a ‘secular bull run’ in debt funds going forward?

We believe that directionally we will see a lower interest rate regime driven largely by falling inflation and fiscal consolidation. As a result, the bond market will continue to do well and we stay bullish on actively managed debt funds. While one cannot call this as a secular bull run,it is for certain that we are in a good period in the interest rate regime.

What are your expectations from the next RBI policy?

Bond yields and bond derivatives do reflect a significant rate cut as we move forward. We believe RBI will cut rates in a phased manner, as there are too many moving variables to track including developments in the global economy. But macro variables are favourable now for a continuous rate cut.

Where do you think the benchmark bond yield, currently close to 7.7%, will settle?

Our house view on benchmark bond yields is positive. We see intermittent volatility and movement in the range of 7.35-7.85%.

What are the key risks for debt funds in 2015?

The first risk could be a lack of improvement in the fiscal situation, second is that crude prices again start rising. In the past few months we have seen a crude price high of $110 and a low of $45, so there are chances that it might spike going forward. I don’t think there will be any major impact of hike in interest rates in the US. If that happens we might see some minimal outflows from Indian markets. But overall I don’t see any major risks which can have a big negative impact on Indian debt funds going forward.

What is your advice to investors now? Should they start investing in long term bond funds?

Investors should continue to have large exposure to debt mutual funds as they offer better returns than bank fixed deposits over time. While it offers better tax adjusted return, liquidity of such investments is also far superior. Having said so, debt mutual funds capture the real market yields on a continuous basis to provide return to investors. In terms of asset allocation, even the most conservative investor should have some exposure to equity mutual funds. I don’t think this is a time to ignore equity as it is an asset class which will help investors beat inflation over the longer period. A lot of investors have invested in chit funds for high returns. I advise them not to make the same mistake, and invest instead in equity (mutual funds) and debt mutual funds.

Birla Sun Life MF is launching an equity fund known as Manufacturing Fund. What is the basis premise of this funds? What will be the investment strategy?

The focus of this fund is investing in companies that only cater to demand in India, especially where there is supply-demand gap. Contribution of the manufacturing sector globally is around 25-28% of gross domestic product (GDP), but in India the sector still contributes only 16% of GDP. The govt is looking at a contribution of 22-25% from the manufacturing sector to GDP over the next five years. Our investment strategy will be fundamentals driven, because most of the manufacturing investments are largely driven by their own balance sheet strength. We will adopt a bottom-up approach while picking stocks for this fund. We will follow multi-cap strategy, across market capitalisation and have a diversified portfolio. I think manufacturing as a theme is a continuous one. While there may be ups and downs in domestic manufacturing, as a base it is a very sustainable theme. Given its potential to generate employment, this sector has to get a boost from the government’s point of view. There are after all over 20-22 sectors which fall within the purview of manufacturing in India.

Do you think this fund will add value to investor’s portfolio?

Birla Sun Life Manufacturing Equity Fund is a diversified equity fund and can certainly add value to the investor’s portfolio. Any investor – existing or new, should have some equity exposure. This scheme gives investors a diversified portfolio with a focus solely on the manufacturing sector. The investment principle remains the same – delivering better returns than the index. With a strong focus on this robust, sustainable manufacturing theme, this scheme provides investors a fairly sound and attractive vehicle for long term wealth creation.

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