Makes sense to remain constructive on equities: Nimesh Shah of ICICI Pru MF

The MD and CEO of the fund house says India remains attractive as firms have deleveraged, credit growth is very low, capex cycle is yet to revive and profit-to-GDP ratio is low too

Intermittent volatility cannot be ruled out but one should remain constructive on equities, says Nimesh Shah, MD and CEO at ICICI Prudential Mutual Fund. In an interview with Chirag Madia, Shah says India remains attractive as corporates have deleveraged, credit growth is very low, capex cycle is yet to revive and profit-to-GDP ratio is low too. Edited excerpts:

Q. How difficult was last fiscal given the crisis in the debt funds and what are the lessons learnt from it?

Compared to 2020, we believe 2017-18 was a much more difficult period when there was a rush for yields without factoring the risks involved. We had consciously maintained the decision-making process based on our analysis of the risk-return trade-off. This discipline had probably resulted in our losing out on many investments made by other market participants, but it helped us avoid credit events seen last year. Some of these risks may have relatively lower probability of incidence, but if they happen, the resultant impact may be detrimental to the performance of the credit investment. The event risk by nature is difficult to forecast. The adverse impact of event risk can be mitigated only through avoiding concentration in investments. In ICICI Prudential Credit Risk Fund, we have a limit stipulated on investment from a single investor. This philosophy has enabled us to deliver superior investment experience to our investors.

Q. Given the current environment, how should one go about investing in MFs?

Over the past one year, the markets have been steadily raising due to which on a trailing valuation basis it may not look cheap. However, from a business cycle perspective, India remains attractive as corporates have deleveraged, credit growth is very low, capex cycle is yet to revive and profit-to-GDP ratio too is low. Globally, all risk assets including equities and commodities are seeing a big boom. Going forward, we believe recovery in the business cycle can help in improving corporate earnings and profitability. Keeping in view all of these developments, it is prudent to remain constructive on equities. Furthermore, with financialisation of savings, a surge in investments is likely leading to higher domestic flows. Intermittent volatility cannot be ruled out given the evolving developments around pandemic situation and global growth recovery. As a means to make the best out of a probable volatile market, an optimal approach for a retail investor would be to invest in a balanced advantage or dynamic asset allocation category of funds where the allocation to equities is dynamically managed. For those considering equity allocation can opt for categories such as flexicap wherein the corpus can be allocated across the market cap spectrum, value, business cycle or special situation category of funds.

Q. Exchange-traded funds (ETFs) are stealing a march over active-funds. Why? And will this continue?

Passive fund growth in India is predominantly led by larger institutional investors. Majority of retail and high net worth individuals (HNIs) investors are still investing in active funds and we expect this trend to continue. The narrow rally since January 2018 with top 10 Nifty stocks dominating made it difficult for diversified active funds to beat the benchmarks. Now with easy central Bank liquidity led inflation and earnings growth, we expect the market rally in the days ahead to become much more broad-based. The early signs of this have been visible since October 2020, where the Nifty50 Index gained 37 per cent while midcap and small cap logged in gains to the tune of 52 per cent and 62 per cent respectively. As rally becomes broad based, we are seeing a trend of increasing allocation towards active funds continuing

Q. Sebi has been tightening MF regulations. What is your take on this, particularly on the new compensation norms?

Despite the tightening regulations, the industry has only grown bigger as investors are increasingly realizing that mutual funds as an investment product are very transparent in nature. We welcome the recent guidelines. For more than a decade, as a policy, a significant portion of the variable pay of our senior management and fund manager’s bonus every year gets invested in ICICI Prudential schemes. Also, most of our employees have the majority of their investments in our schemes only. So, for us, this is hardly any change.

Q. ICICI Prudential has consistently been amongst the top AMCs? What steps have you taken to reach there?

The AMC business is all about investment performance and delivering a positive investment experience. Today, we have a formidable presence across equity, debt and hybrid categories of funds. We are the pioneers when it comes to the asset allocation category of schemes. Over the last 22 years, there has never been a default or delay in payment of interest in any of our debt schemes. In terms of equity as well, we have strategies across the board. We believe asset growth is a sign of investor confidence in our fund management capabilities owing to the good investment performance we have delivered over the last two decades.

Q. Many new players are entering the MF space specifically on the fintech side. Is that a threat to established players?

We welcome the new age fintech players who are participating in mutual fund distribution and AMC business, as it will further enable penetration of mutual funds in India. While fintech is the delivery mode which most AMCs have focused upon, the AMCs which have delivered a positive investment experience have been successful in growing their businesses.

Q. We have had few fund houses go public the past few years. Do you plan to join your peers in going public in the near future?

The increase in the choice of listed asset management companies is a positive both from an investment and a player’s point of view. The decision to go public depends upon the shareholders and shareholder’s prerogative and hence, I would not like to comment on that.