Equities Are The Best Wealth Creator In The Long-Term

A balanced advantage fund provides inflation-adjusted real returns, says Ajit Menon CEO, PGIM India Mutual Fund
Equities Are The Best Wealth Creator In The Long-Term
Equities Are The Best Wealth Creator In The Long-Term

Q1. After witnessing considerable outflows in equity, investors seem to be moving back to Systematic Investment Plans (SIPs). What could be the reason? Is it that investors booked profits and are now reinvesting? Please share your views.

We believe outflows from equity funds were driven by a combination of panic, profit booking, and investors focus on building cash reserves. We have seen this trend in the past. When markets recover after a sharp drop, investors first redeem and decide their next course of action. That next course of action for many clients has been to re-enter the markets systematically using the corpus. In some cases, investors who lost jobs or faced reduced incomes redeemed early. Following a revival of the economy, increasing incomes, and organisations reinstating salaries, these investors are returning and reinstating their SIPs.

Many people are now saving more as their lifestyle expenses have reduced. These savings are now being ploughed back. Meanwhile, as markets continue to rally, an eagerness to participate in the up-move has crept in. These investors saw that their friends and relatives who stayed invested or invested more, are making handsome gains.

Q2. In volatile markets like these, which category of funds would you recommend to investors and why?

Volatility is inherent to markets. The best way to take care of this is to find yourself a good, trusted advisor who can devise the right asset allocation strategy suited to your risk appetite. The Balanced Advantage Fund (BAF) category dynamically adjusts equity and fixed income assets in a tax-efficient way within a fund structure. These funds benefit from taking the stress out of timing the market either to enter or exit. The strength of the underlying model of asset allocation and its robustness is the key. For example, the recently launched PGIM India Balanced Advantage Fund uses an existing model based on the variation of near term price per equity (P/E) to the 15-year rolling average P/E of the Nifty. It is used to decide whether markets are attractive or expensive.

Taking a rolling average will keep the model current for times to come and is a real differentiator from other existing allocation models that are mostly static. Indian markets are maturing all the time, and therefore the model must keep pace automatically. The BAF category is rarely one that seeks to maximise returns. Instead, it tries to give a real return adjusted for inflation and a much smoother ride taking due care to protect downside risks relative to markets.

Q3. Share your views on the year ahead. What could investors expect in the short and long term?

As an asset class, equities would continue to be the best wealth creator in the long term. It's the only asset class that captures innovation. However, equities are also a highly volatile asset class, especially in the short-term. After a strong rally, driven by liquidity, a better handle on the virus, an improving economy, and strong corporate performance, investors should be prepared for higher volatility in the near term. Corporate India has been remarkably resilient in recent months and, on a low base, likely to report about 35 per cent profit growth for 2021-22.

 Q4. What, according to you. are the four points investors should consider before investing in mutual funds?

Before investing in mutual funds, investors must take the following steps.

1) Ensure that your protection requirements are taken care of using insurance cover for life, medical, and general.

2) Build an emergency corpus that is roughly six months to a year of household expenses depending on how conservative you want to be.

3) Have an overall plan on your family's financial priorities and goals, including your appetite for risk-taking. It is recommended to prioritise your retirement goal first since it is the only financial goal for which you do not get a conventional loan.

4) Take references and appoint a good advisor or mutual fund distributor who can help you get going and handhold you along the way. Your advisor or mutual fund distributor would guide you on what is suitable for your needs.

Q5. The year 2020 was a rollercoaster ride for every business. How did PGIM India fare during this period?

PGIM India had an exceptional 2020 in terms of business. When the industry witnessed redemptions and net outflows, Assets Under Management (AUM) at PGIM India, grew 33 per cent to over Rs 8000 crore. We received over Rs 1,000 crore in net positive flows across our equity funds. This helped us move three ranks up on the league table during 2020, and we are poised to grow further. Whether they be new subscriptions, unique clients, or SIPs, most parameters saw around ten-fold growth in 2020. Our international fund of fund products gained much attention. We crossed the $ 100 million mark in AUM in this category.

Q6. What is the roadmap you have for PGIM India? How do you see the business growing? Any acquisition in the pipeline? 

It is essential to be a relevant player, and we would like to be among the top 20 asset managers in India as a near-term goal. If an opportunity for acquiring a complementary business were available, we would indeed evaluate it seriously. We see ourselves doubling organic growth in the coming year. Business growth in our industry is dependent on the consistent performance of investment platforms. This comes from having a consistent and robust process benchmarked to best in the world. Our parent, PGIM, holds a 140-year legacy and is the 10th largest asset manager globally.

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