Mutual Funds Aiming Growth

Rahul Bhuskute
Head Structured & Credit Investments
ICICI Prudential AMC

Please share with us your journey in the Indian markets so far? 

I have been in the banking and financial services sector for the last 15 years, predominantly with the ICICI Group. The common theme across these 15 years was that I was looking at Indian corporate credit and taking credit calls either by way of lending or investment. My last role was in the London office of ICICI Bank where I was overseeing a credit book of around USD 3 billion. I joined ICICI Prudential AMC around 9 months back as I felt that the credit market in both the mutual fund and alternatives space is poised for significant growth over the next decade. 

My role in the fund house is to strengthen credit as a separate asset class, sitting alongside equity and duration. Credit or accrual products as they are usually referred to, are becoming increasingly popular with both HNI and retail investors as they give a higher yield than traditional fixed income avenues and are also typically less volatile than equities or gilts. There is also significant action in the credit alternatives space as banks and other traditional providers of capital are not able to meet unique demands in non-traditional situations like sponsor finance and growth capital. My mandates are to source credit across different risk-return profiles, and distribute them wherever there is a latent demand for this asset class. 

What has been your investment philosophy? 

My investment philosophy is clearly crystallising the risk appetite and then build return expectations. Once you have done this then you just need to set up an operating framework which encourages sourcing deals and meeting that framework. You need to mark out boundaries upfront and then review those in light of evolving market situation. I am in an asset class where it’s much easier to take higher risk and deliver higher returns. Typically the returns come first as any downgrade / default only happens later. Therefore the importance of having a disciplined investment framework cannot be overemphasised. 

As a fund house, the first thing that we have done is to define the risk appetite vis-à-vis various funds. We created an investment framework with checks and balances, incorporating limits across rating and investment structures. Th en we created a target list of companies that we would want to invest in, which meets our framework. We built a team which is capable of sourcing deals in these target companies, in many situations we source our deals directly. We have set up a process where we regularly meet our investee companies to assess our credit on a real time basis. So what we have done is create a proper process around the whole investment game, which brings in the necessary degree of rigour to it. 

Please explain the concept of credit and structured investments for the benefit of our readers? 

Credit investments are where there is an element of credit risk i.e. risk of nonpayment on due date. To take this risk you get a higher rate of return. So for example if you are giving money to a corporate, that is (typically) more risky than giving money to the government or to a bank. Therefore, you would demand a higher return for this investment. As a fund manager what you then need to do is build a well-diversified credit investment book, where on a risk-return basis your aim should be to deliver a higher return than a government bond or traditional fixed income avenues. Of course given that the risk is higher, you need to make sure that your asset selection process is robust so that you do not end up putting money in any investments with higher risk of default, thereby eroding your returns.

A structured investment is when you invest in a structure that is not plain-vanilla i.e. where you are investing in a nontraditional situation. For example instead of investing in an operating company you invest against receivables from a contract, or shares or property. Typically structured investments carry higher yields; however these have to be done in a judicious and disciplined manner and the fund manager has to have experience of analysing the various risks associated with the structure. 

What is your take on the interest rate front and how do you see it panning out going forward? 

I think as a fund house our view on duration is bullish. We believe that the probability of decrease in interest rates today is far higher than the probability of a rise. Yes there might be some hiccups along the way as today we live in a very volatile environment and need to take into account not only what is happening in this country, but also in Argentina. But for the patient investor, an investment in duration should start giving good returns in the medium term. We feel that government borrowing at 9 per cent levels is not sustainable and therefore slowly but surely government and RBI will take steps to bring interest rates down. 

What is the right strategy to invest in debt funds especially in the current scenario? 

I feel that accrual products should form a part of every investor’s core portfolio allocation. This is an attractive product, given both the higher yields and tax benefits vis-à-vis a traditional fixed income avenue. Off -course it has a higher risk profile than a FD and therefore proper due diligence needs to be done on the fund. In terms of duration that should be a tactical call depending on the expected direction of interest rates. Our view is that for a patient investor, duration should be a good call and therefore he can look at investing in gilt funds with longer maturities. 

What should be the ideal portfolio for an investor in terms of allocation to various asset classes? 

There is no fixed answer to this as every investor has a unique situation in terms of his risk appetite, his investment horizon and his regular income requirements and also tax status. Therefore it is critical that an investor has a conscious understanding of his situation before he makes any investment decision, something a good investment advisor can help him or her with. The only advice I would have is to maintain a well-diversified portfolio and not put all eggs in one basket. Also try and avoid every high in the market. As a fund house we strongly believe in managing downsides rather than capturing every upside, we believe that is a better investment philosophy. 

With respect to the Indian markets and Indian investors, how challenging is the fund management industry? 

I think the fund management industry is in a position of great potential. If you compare the aggregate AUM managed by the MF industry to the aggregate bank deposits, we are just a small fraction. In more developed markets, MF AUMs are a far higher portion for the investor’s wallet. So it is a challenge to the industry to create more awareness about MFs as better investment products. 

I feel that the industry has already started seeing AUM growth and this trend will continue as investors become more aware of the variety that this industry offers in terms of investment options. For example credit or accrual products are a relatively new assets class. If managed by the industry properly, this class has a huge potential. In UK, where I used to work earlier, individual credit funds are worth billions of pounds in amount, we are just scratching the surface here.Having said that the industry can do a better job of educating the investors on various products. 

We as a fund house are actively reaching out to investors through our outreach programme so that the investors can make a better, more educated investment decision. 

What is your advice to investors in the Indian markets at this juncture? 

I think I would say that as a fund house we are recommending the following themes: 

• Accrual products should form a part of core portfolio. 
• Volatility is here to stay. Therefore we are recommending products which make money out of volatility such as our Balanced Advantage Fund and Dynamic Plan. 
• In terms of equity we are recommending investors to increase their share to this asset class, especially in the mid-market space. 
• For the patient investor, duration should yield good returns eventually.