A Balasubramanian, MD and CEO of Aditya Birla Sun Life AMC Ltd, says the slowdown in equity flows is the function of economic slowdown and also global sentiment. In an interview to the Indian Express, Balasubramanian — who manages assets worth Rs 253,838 crore — said the government should consider reducing the highest tax slab for individuals in order to boost investment. Excerpts:
While the economy is slowing down, stock markets remain at all-time high. Don’t you think market should reflect the fundamentals?
Stock market is generally driven by various factors, apart from earnings and valuation. Though economic growth has been low for the past one year, the government has been continuously carrying out structural reforms in order to set the economy on a strong footing for the future. The cut in corporate tax or focussing on stressed assets in the banking system are all pointing towards creating a vibrant and predictable economy.
Lastly, Indian companies, especially the ones which have highest governance standards, backed by strong business model continue to attract foreign buying, hence keeping the broad indices buoyant. However, economic slowdown reflected in mid and small-size companies is leaving a huge underperformance of broad market versus handful of stocks. I presume the time has to come to reverse this trend purely on the basis of confidence returning to the market.
Do you think the DHFL collapse will hit the financial sector in general and mutual funds in particular?
DHFL is currently under the resolution process, with the RBI monitoring the whole administrative process. When the company defaulted to lenders, it came under the earlier model of ICA process. With the recent amendment to IBC, that included NBFC as part of a similar resolution process, I would assume the prospects for recovery will go up. Under the waterfall mechanism, decent portion of the outstanding should get recovered, if not 100 per cent. Therefore, it should not further impact either the NBFC industry or mutual fund industry.
MFs have drastically cut down funding of the NBFC and realty sectors? Do you see more risks/woes in these sectors?
Yes, we have reduced exposure to this segment including real estate borrowers. In general, mutual funds (MFs) are quick in cutting risks as most of the exposures are short term in nature. However, as things improve for these sectors and one feels there is room to take risk, exposure to them may become little more widespread as against the current diversification.
Equity inflows to mutual funds have come down in the last six months? Are investors shifting their portfolios?
The slowdown in equity flows is the function of economic slowdown and also global sentiment. While there has been a reduction in the flow, I would assume this will get better as time progresses. Investors do make adjustments to their asset allocation, depending upon their current portfolio construct and on the basis of this one may have seen some redemption in equity schemes.
What should be the ideal portfolio of an investor in the current situation?
Generally, one should start with 50 per cent in equity mutual fund and 50 per cent in debt funds. In the current situation, within the equity space one can choose between multi-cap and balanced funds. And in the fixed income space, it can be short duration fund and corporate bond fund.
What are your suggestions to the Finance Minister for consideration in the forthcoming budget?
Budget should take steps to boost consumption by cutting tax rates further for individuals. In fact, the government should consider reducing the highest tax slab for individuals in order to boost investment. While such cut may be seen as fiscal negative, the rub off effect is huge generating gain for the future.
GST rates too need to be streamlined in order to increase compliance. Lastly, GST on mutual fund distribution should be brought to five per cent if not zero, given the importance of increasing the penetration of mutual fund industry.
Do you foresee any change in investment trend/pattern in view of the declining interest rates?
Interest rate drop would lead to a decline in deposit rates of banks. Therefore, cost of borrowing will come down and thus their lending rates. This will help in bringing down the cost of capital for new investment. Existing companies that are leveraged may also benefit out of the drop in interest rate.
As a consequence, equity as an asset class would remain one of the primary investment avenue for investors. Mutual fund fixed income schemes too would find its place in investor portfolio given the interest rate reduction in bank deposit.