“Investors with a long-term approach would have a better experience”
The interest rates in India have been quite stable over the last 18 months and as such volatility has been quite low in the Indian bond markets. At PGIM India Mutual Fund, CIO Vinay Paharia believes that managing risk is an integral part of portfolio management and prudent risk management goes a long way in ensuring superior and consistent long-term performance.
With the current economic data showing mixed signals, what is your near-to-medium-term outlook for the Indian economy and the equity markets?
The economic activity has slowed down since the last few quarters, largely led by weakness in urban consumption and government capital expenditure spending. This is likely to hurt near-term earnings estimates. However, the impact on markets can only be judged based on the sustainability of such trends. If the weakness persists, it may have a negative near-term impact on the markets, while if it turns out to be transient, it may have a limited impact.
What are the key principles and philosophies that guide PGIM India’s investment strategy, and how do these differentiate the firm in a competitive market?
The investment process that we follow at PGIM MF for our equity-oriented portfolios is divided into two parts, as follows:
1) Stock Selection: We select stocks by starting with a universe of listed stocks, which have more than Rs 1,000 crore in market capitalisation. There are more than 1,100 companies which satisfy this criterion. We then identify companies which satisfy the twin criteria of a) higher than average return on equity (RoE) and b) higher than average growth in earnings on a forward and a sustainable basis. Post this, we do a thorough due diligence on management quality and if found satisfactory, we select the stock for inclusion in our mutual fund investment universe.
2) Portfolio Construction: Once a stock is selected for inclusion in our mutual fund investment universe, it is allocated to different portfolios based on parameters like:
a) Valuation: We measure the fair values of stocks for the next five years and compare the current market price with the five-year hence fair value to compute the potential upside. Ceteris Paribus, the higher the potential upside, the higher the allocation to a particular stock.
b) Market Capitalisation: All other things remain the same, the higher the market capitalisation of a stock, the higher the allocation. Thus, if a Large-Cap company offers the same upside as a Small-Cap company, the allocation will be higher toward the large-cap company.
c) Other Factors: We consider a host of other factors like fund house view on the particular sector, liquidity in a particular stock, our macro views, etc.
The increasing global influence on Indian markets is undeniable. With the recent U.S. election where Donald Trump was elected as the president for the second time, what consequence could this outcome have on key Indian sectors like technology, finance or pharmaceuticals?
Overall, the economic partnership between India and the U.S. has become stronger across different U.S. administrations, with increasing cooperation in many strategic sectors like technology, defence, etc. There will likely be greater efforts on both sides towards strengthening these relationships post the recent change in regime in the U.S. Also, there could be increased supply chain diversification by American multinational companies away from China and into India in sectors like pharmaceuticals, engineering, IT, semiconductors, etc.
Thematic and sectoral funds are becoming increasingly popular among investors. What is your outlook on these offerings? How do you at PGIM India Mutual Fund manage risk in such investments?
We would consider thematic funds as a supplement to the core investment portfolio for our investors. We would like to have thematic products which offer a sustainable investment outlook over the long term. We would like to stay away from cyclical or transient themes.
The fixed-income market is currently dealing with fluctuating interest rates. How does PGIM India Mutual Fund manage interest rate risks within its debt portfolios, and what is your outlook on Debt Funds in the near term?
The interest rates in India have been quite stable over the last 18 months and as such volatility has been quite low in the Indian bond markets. At PGIM India Mutual Fund, we believe that managing risk is an integral part of portfolio management and prudent risk management goes a long way in ensuring superior and consistent long-term performance.
As far as managing interest rate risk is concerned, we follow a process of risk budgeting wherein we have internally defined the maximum duration risk banks for various categories of funds. Our outlook on debt funds is constructive as we believe that we are at the cusp of monetary easing in India, given the slowdown in growth. We expect a cumulative 50-75 bps of policy rate cuts over the next one year and our debt funds are positioned accordingly.
With the mutual fund industry experiencing rapid growth, what are your thoughts on the future of the industry? What trends or regulatory changes could shape its path in the next few years?
Given that the overall equity penetration of direct equity and mutual funds is still low in India as compared to developed economies like the U.S., there is room for ample growth for asset management firms. As India’s per capita income grows, the surplus savings will flow towards financial assets like mutual funds after households have taken care of their basic needs.
The regulator has taken many measures to build that trust across categories for making mutual funds a preferred retail vehicle. Individual funds will need to continue to work on the unique proposition that differentiates them in the sea of sameness and particularly the customer service experience. We believe the new asset class will pave the way for expanding the investor base further as investors look for more sophisticated strategies beyond MFs. Increased adoption of artificial intelligence and machine learning in asset management are trends to watch out for.
PGIM India Mutual Fund has seen good growth in its AUM. What strategies or innovations have contributed to this success, and how do you plan to sustain this growth
Domestically, while we work across all the segments, our team has built a good product in the Mid-Cap and small-cap segments that have worked very well over the past few years and we believe will stand us in good stead in the future as well. We leverage the expertise of our parent brand PGIM and have unique and diversified international funds like the PGIM India Global Equity Opportunities Fund and PGIM India Global Select Real Estate Securities FoF as well as the PGIM India Emerging Markets Equity Fund. Building on the platform through PMS and AIF has also brought depth and helped us to be present on more distribution platforms. All of the above combined with relevant values that add innovative properties for our distribution partners in areas like retirement will help sustain this into the future.
For investors just beginning to invest in mutual funds, what type of funds or strategies would you suggest they start with to balance growth and stability?
Various studies have shown that the probability of experiencing negative returns or lower returns from equities goes down as the holding period increases. Thus, investors who have a long-term approach to investing would have a better experience. New investors who have entered the market post the pandemic are seeing markets consolidating now, bringing the focus on risk-adjusted returns and downside protection.
For first-time investors with a three-year-plus horizon, we recommend investing in hybrid categories like balanced advantage funds or aggressive Hybrid Funds. Those with a lower risk appetite can consider equity savings funds or conservative hybrid funds which can provide a blend of growth and stability. Investors should invest by taking into account their risk appetite, goals and the time horizon. A trusted financial advisor can help investors plan for their goals as per their unique aspirations.
Disclaimer: The opinions expressed above are personal and may not reflect the views of Dalal Street Investment Journal.