Tax parity will give MFs a level playing field: Axis AMC's Chandresh Nigam

The mutual fund (MF) industry has long been asking for parity in the taxation of different investment products. In the latest Budget proposal, the industry has listed this proposal. Chandresh Nigam, managing director and chief executive officer, Axis Asset Management Company, says uniform taxation will be beneficial to both the investor and the MF industry by way of simplified taxation. This will ultimately boost the financialisation of savings in India. In conversation with Abhishek Kumar, Nigam also shares why Axis MF is filing for a flurry of target maturity funds (TMFs). Edited excerpts:

The market is hitting new highs after remaining range-bound for over a year. What is driving them?

Indian markets remain the most expensive. Valuations are higher than the long-term average. This suggests that the market is quite optimistic about India’s short- and medium-term outlook, given the ongoing economic recovery, India’s stronger economic growth relative to most other economies, and a likely peaking of inflation. The latest round of corporate earnings has also buoyed markets higher.

What type of equity funds would you recommend in the present-day market scenario?

Equity fund selection depends upon an individual’s risk profile. But if I were to choose one, it would be the flexicap. The fund’s structure allows fund managers a wide remit to achieve wealth-creation goals. The offering also makes for a one-stop solution for any investor looking to participate in the equity markets.

What are your Budget 2023-24 expectations? Do you see the government coming out with any proposal specific to the MF industry?

Amfi has made a series of recommendations on behalf of the MF industry. One critical proposal is parity in taxation across the investment spectrum. This would benefit investors by way of simplifying taxation and levelling the playing field for the MF industry, leading to greater financialisation of India’s savings.

Which sector or theme would you recommend to an investor looking for exposure to sectoral/thematic funds?

Equity investors should stay cautious of short-term fads and trends. Investors should consider broad market funds like flexicap, where the fund manager does the job of identifying the right sectors and themes. This saves the investor the hassle of switching funds.

MF growth in terms of assets under management (AUM) and new investor additions this year moderated, compared with 2021.

The MF business has grown significantly in five years. AUM has nearly trebled as investors got introduced to the MF way of investing. Markets doing well added to the allure of MFs. Growth in 2022 has tempered somewhat on account of the base effect. Markets have also taken a breather this year on account of several global headwinds. The MF industry is a cyclical business reliant on the overall performance of the markets.

Axis MF has filed papers for a clutch of TMF’s new fund offers. Do you see high demand for passive debt funds?

TMFs have become a popular fixed-income offering. The target date approach is akin to the fixed deposit culture that is so well imbued with the financial planning for millions of investors with a limited understanding of the nuances of fixed-income markets.

The current opportunities in this space make such products attractive - both from a return perspective and a tax efficiency angle.

Furthermore, like us, the industry today offers products in the high-quality segment of the markets (government securities, state development loans, public sector undertaking AAA/private AAA bonds). The simplicity and transparent nature of these products are also an added advantage.

Should investors consider longer-term debt funds as yields have gone up? Or should they wait for the rate-hike cycle to get over?

While we do not anticipate the end of the rate-hike cycle yet, market yields are unlikely to rise materially from here on. Markets have priced in terminal rates close to 6.25-6.5 per cent levels, signalling they have priced in a policy rate of 50-75 basis points from the current levels. Our call to migrate portfolios to relatively longer tenor assets over the past few months has played out well so far.

For investors with a medium-term investment horizon, we believe the time has come to incrementally add duration to bond portfolios. This, however, does not imply approaching the extremely long end of the yield curve as inherent volatility could be a factor in the near term.

The impending inclusion in the global bond indices could result in long-term flows into government bonds which may result in capital gain opportunities for investors.

Beyond India, which market is the most attractive right now?

I believe the global markets have absorbed significant pain over the past 18 months. My approach to international investing is driven purely by a diversification play. The opportunity to invest globally is determined by the fact that many themes are not available in India.