Retail investors learning to take volatility on stride: Akhil Mittal, Tata MF

In a chat with ET Now,Mythili Bhusnurmath, Consulting Editor, and Akhil Mittal , Senior Fund Manager, Tata Mutual Fund, discuss macro cues and how some of the earlier fears that retail investors enter very late and exit very early might not hold true going ahead. Edited excerpts


ET Now: Yes Bank was a very high profile issue that has not gone as per plan and investors on the street who have been very bullish on the banking space for a while the prospects there look most robust are questioning pricing for the issue, how do you see this whole saga, what is your take on it?

Mythili Bhusnurmath: Well there is a serious loss of credibility not only for Yes Bank but also for the lead bank managers, the investment banks involved and they had a list of stellar names in the investment banking space. So clearly, the excuse there were some confusion about the guidelines just does not hold. It does not wash at all because whatever the guidelines, they are pretty clear and QIP is not a new instrument at all. Markets are familiar with them, the investment bankers are also familiar with them. So the excuse that has been given by Yes Bank just does not hold. Hence, there will be a serious loss of credibility for the bank and one will have to wait and see how it fares, how the QIP fares if and when they defer it when they come out with the new issue subsequently.

Also as far as the allegation that there was excessive volatility if at all, there is something to the argument that there was some kind of manipulation in the shares. This is when SEBI should actually step in and find out was there any kind of manipulation on the shares and if not, and that is merely an excuse, I think this raises a lot of questions.

As for the investment banks, there is an allegation they did not do proper due diligence and did not inform Yes Bank properly. I think they also will need to take it up with the Yes Bank that in case there was some issue then what was your onus, what is our responsibility? So, there are a number of issues that need to be raised and if at all SEBI’s guidelines are not clear and the bank had a problem with them, they should have taken up these guidelines before the issue and not while the issue was open.

Mythili Bhusnurmath: Akhil, you are from the mutual fund industry and mutual funds have had a dream run in this financial year. August was a particularly good month. So this does seem to suggest that retail savers who had all along been going to banks are now perhaps shifting their loyalties to the mutual fund industry and will this loyalty continue to hold if and when the market reverses and they see the Sensex and Nifty falling because that is quite possible with markets unlike in the case of banks that whatever return you are going to get that is more or less constant whether it is savings bank, whether it is fixed deposits so are these beginnings of a trend of investors shifting from banks to mutual funds?

Akhil Mittal: Yes, so what we are seeing is that over a period of time with all the investor education and the mutual fund performance that has happened over the past, there is a shift in preference as far as savings is concerned. We are seeing savings being channelized not only from the retail end but from retail, SME, MME to the larger institution towards mutual fund space. The space has done pretty well.It has participated in the systemic shift in the economic regime in the interest rate shift. So broadly investors are gaining confidence by investing in mutual funds and what we are seeing is that longevity of money is increasing.

We expect that going forward, investors will continue to see some sort of shift towards mutual funds to the extent that the regulations or the guidelines or the procedures to invest in mutual funds have been easing and have been becoming more transparent over a period of time. So this also pushes the retail investors into mutual fund investing and staying there. So overall, we are seeing the shift though it is early stages yet but we expect this to go forward.

Mythili Bhusnurmath: But if our past experience is any guide, what we have seen is that the retail investor is always the last to enter. He comes in the last phase of the bull run and then when the market reverses, he promptly exits. So are we going to see a repeat of that? How can one tell the retail investor that ups and downs are part of participating in the capital market. Are you sure that the retail investors’ loyalty is for the long term or is it there only for the upside and the moment the market reverses, he is going to exit?

Akhil Mittal: See the past trend suggests that retail investor does shift once they see some losses in the mutual funds but over a period of last seven-eight years we have seen markets cycles, we have seen mutual funds going down with the market. The performance is going down and then coming back up again with the market.

So to that extent, there is a long visibility, a long performance chart or a long chart of how mutual funds have fared over the past. So the extent of fear of mutual fund performance is going down is reducing, so investors confidence is happening over there. We cannot say for 100% surety that even if markets go down, retail investors will not get out but the quantum and the magnitude might be lesser and what we are seeing is that people now are, as you have longevity of your investments as people are now more and more inclined to stay invested for a longer period of time, the volatile bouts pass by and the decent returns can be made. So to that extent, some of the earlier fears that retail investors enter very late and exit very early might not hold true going ahead.

We believe that retail investors will stay for long going ahead and they will see market volatility passing by. So we are not expecting too much knee-jerk reactions going ahead as we saw in some of the 2008 or 2013 cycles in the past.

Mythili Bhusnurmath: Is there a difference in the behaviour of the equity mutual fund investor and the debt mutual fund investor? Do debt mutual fund investors tend to stay, are they more captive, are they more sticky than the equity fund investors or because we have recently seen even debt mutual funds, they have been much more volatility than in the past. What is your expectation from them in terms of behaviour?

Akhil Mittal: As far as differentiation between equity investment and fixed income investment is concerned, fixed income investors are generally slightly more sticky than the equity investors. Equity does tend to give capital loss but to a certain extent, if you stay invested in fixed income funds for a decent point in time or a decent period of time, you do see some recovery even in case the interest rates tend to go up. So even in the worst of cycles, you have seen positive returns being delivered by fixed income mutual funds.

So investors tend to stay more longer in the fixed income space and the money is more sticky as far as the comparison between two is concerned. But to that extent, in the equity mutual fund, we are seeing the SIP book industry wide increasing and that is a pretty heartening scene that basically means at the ground level, retail level, at the lower income or the middle income group, people are accumulating their mutual fund investments or capital market investments over a period of time and such investments generally do not redeem with any sharp market volatility.

They tend to stay for a longer period of time. So I believe both equity and fixed income mutual funds investment as far as retail investor is concerned are going to be more sticky than they were in the past.

Mythili Bhusnurmath: Given that we have seen yields fall quite dramatically in this financial year, what would you advise somebody who has invested in debt funds? Would you ask them to book their profits and exit or you think there is scope for it to fall further and if so, how much lower can it get from 7.03%? We have seen the issue come in at 6.97%. Will we find these also going lower to 6-6.5, what is your sense?

Akhil Mittal: As of now, there is all good news in the market, there is no alternative (TINA) factor. So liquidity is abundant. We are not expecting Federal Reserve to hike rates any time soon. That is the market probability as of now. On the inflation front, we are expecting inflation to come down. So, broadly there is no major negative factor in the near term offing.

Given the scenario, it is difficult to say that yields would harden substantially or very quickly in any bout so that markets can remain supported. Whether there can be a substantial downside to yields further is difficult to say but to cover on the upside I do not see too much of fear in the market as of now so that the yields can go up, no major negative. So broadly we see 6.90-7.15-7.20 the band for the old 10-year or let us say the new 10-year staying and sustaining below 7%.

Also, if inflation does come below market expectations, so our expectation for the CPI number is close to 5.20 there is likelihood that this number could be closer to 5. If that happens then we are probably going to see RBI having more space to ease policy rates. In that case you can see a further rally in rates. In a nutshell you will see fixed income funds performing well even going ahead though the extent of profits or the fall in yields, if you are expecting that, would not be as great as it was over the last six months.

Mythili Bhusnurmath: So the possibility that the central government might not be able to stick to the fiscal deficit target and you might see more borrowings by the government, that is not coming into the picture at the moment, right?

Akhil Mittal: As of now, market is not contemplating that. We are not seeing that even if the government has to do a little bit of leeway in fiscal deficit . There could be alternate sources of funding and the government might not actually come to market to borrow that amount.