The mutual fund industry has come for some serious criticism in the recent past. The reason: It has completely missed the stock market rally that started from early March and has given returns of over 70 per cent to investors. Madhusudan Kela, head (equities), Reliance Mutual Fund, which has the highest average assets under management and investor base, speaks to Palak Shah and explains why fund houses are being judged unfairly. Excerpts: Last year, fund houses faced a lot of criticism because they went overboard with their exposures in certain risky sectors. Even in the recent rally, fund houses have been simply sitting on cash. Is there a case that fund houses are unable to read markets correctly?
It would be wrong to say that the mutual fund industry, especially Reliance Mutual Fund, has missed the recent rally. The problem is that even when we are investing in Nifty futures, it is deemed as sitting on cash. Most fund houses do not have more than 15 per cent in cash. While it can be said that majority of the fund houses have not been able to maximise their returns from the recent rally, labelling them as complete failures would be too much of an exaggeration.
Mutual fund returns should not be judged on a month-on-month basis. While schemes have underperformed the stock market for sometime, it is the only vehicle in which investors have not suffered huge losses. In fact, some could be sitting even on decent returns. Those, who have been regularly investing in the past one year, have got better average returns than bank deposits. Even the net asset values (NAVs) of various Reliance schemes have moved up significantly in the recent rally.
Mutual fund returns should not be judged on a month-on-month basis. While schemes have underperformed the stock market for sometime, it is the only vehicle in which investors have not suffered huge losses. In fact, some could be sitting even on decent returns. Those, who have been regularly investing in the past one year, have got better average returns than bank deposits. Even the net asset values (NAVs) of various Reliance schemes have moved up significantly in the recent rally.
Do you think there are enough hedging tools available for funds to minimise risk during rising as well as falling markets?
For instance, mutual funds don’t make good use of the options segment. Is there a reluctance to pay high premium?There is no level playing field for mutual funds compared to foreign institutional investors (FIIs). The rules for FIIs are far more liberal. The only tool available for funds is to short sell Nifty futures. There is no reluctance to pay the premium for options. But at an individual level, investors have to shell out only 10 per cent margin. Funds, on the other hand, have to make a provision for the entire position. As a result, there isn’t enough leverage available and hence, not many funds take huge positions in this segment.
What is the average churning ratio of your portfolio? Is there any intra-day trading involved too?
The churning of portfolio at Reliance Mutual Fund is very little. Most of the schemes hold stocks for three to five years. However, when faced with extreme situations like in 2008, it becomes necessary to find defensive stocks and switch over to reduce risk. Most of the intra-day trades are only in the futures segment.
After the Satyam fraud, there were talks that the mutual fund industry was planning to make the due diligence process much more stringent. There were also reports that extreme steps like shunning companies with a bad track record were on the anvil. Has the industry reached any consensus?
I can only say that the due diligence has increased after the Satyam scam. The industry has become more vigilant and decided to be more proactive in approaching authorities against errant companies.
The recent rally has been quite frenzied though the fact remains that the world economy is still not out of woods. Economic problems in the US and Europe continue to persist. Do you think that there is a decoupling of the Indian market from the other world markets?
The emerging markets, especially India, will be decoupled from the US and European markets for a while. In fact, the situation in India would start improving significantly after the decisive mandate to the United Progressive Alliance (UPA) because it would give the government a lot of freedom to act without any pressure.
While the economic recovery might be slower-than-expected by markets, the demand in economy will not fall too significantly. Reforms will be able revive our economy.
While the economic recovery might be slower-than-expected by markets, the demand in economy will not fall too significantly. Reforms will be able revive our economy.
Has the investor’s risk appetite changed in recent times? What are the sectors you are bullish on?
The investor’s risk appetite is gradually changing. Our fund house has followed a strategy to maintain across the sector themes to increase investor base. We believe that the sectors that are driven by domestic demand would do extremely well. But specifically, we are bullish on infrastructure and power sectors. I also believe that the pharmaceutical sector also would do well.
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