What is the rationale for launching ITI Arbitrage Fund?
In volatile times like this, arbitrage funds generate returns by harnessing the price differential between the cash and futures market. Volatility is good news for investors in arbitrage funds as their returns go up during periods of market turmoil. One of the chief benefits of arbitrage funds is that, they are low risk. There is virtually none of the risks involved with longer-term investments. This makes this type of fund very appealing to investors with low risk tolerance. We want to create a basket of low volatile, tax efficient products where risk reward is favorable to investors. Arbitrage fund fits into that bucket and therefore intending to launch the fund.
We have seen negative returns in liquid funds, what are the chances of getting negative returns in arbitrage funds compared to liquid funds?
If you are having a horizon of one month and above the chances of negative returns are low. If you are investing from one derivatives expiry date to next month derivatives expiry date the possibility of making negative return is negligible. If you are having lesser than one month investing period there are very unique market situations that the fund may generate negative returns as well.
How ITI Arbitrage Fund offers unique proposition to investors? (How the fund is different from other arbitrage funds in the market)
Ours is a true to label arbitrage fund. The fund aims to provide the best arbitrage experience to investors. As per the SID itself, it is uniquely positioned; the fund will invest in equity arbitrage opportunities. If the arbitrage opportunities are less in the market, the fund will invest in high quality liquid debt securities with maturities less than 91 days.
Why distributors should look at recommending arbitrage fund to their clients? Why do you think arbitrage funds can be an alternative to liquid funds and bank deposits?
Arbitrage funds provide better tax efficient returns than liquid funds and bank deposits as per prevailing income tax laws. Therefore these funds are more suitable for short term parking of money with less risk.
Most large investors like corporates and HNIs look at spreads to invest in arbitrage funds. How the fund would ensure better performance in the absence of attractive spreads?
Markets generally provide good arbitrage opportunities most of the time. Arbitrage funds returns tend to move with short term interest rates, however if there are higher volatility in markets more arbitrage opportunities would be available, thereby enhancing returns. In the absence of attractive spreads, the fund has the option to invest up to 35% in high quality liquid and lesser than 91-day instruments, which would provide the better return experience.
Talking about markets, what is your short and medium term outlook on equity markets?
The current market scenario appears to be not very encouraging with sharp fall in equity markets, weak economic data, not so encouraging corporate results and management commentary. However, we see many silver linings among the dark clouds. Despite the recent weak growth, India’s long term growth outlook remains strong. Market valuations are near longer term average, in fact many sectors and stocks are trading below their long term valuation multiples, interest rates are declining, liquidity is improving, oil prices are stable. So conditions for economic recovery are there. The pace and timing of improvement is not certain but improvement is bound to happen. We feel investors who use this volatility to increase their equity exposure in a gradual manner, with a three year plus time horizon, will reap a handsome reward.
The Indian economy is structurally very strong. We are a balanced economy with three legs of growth domestic consumption, domestic investments and exports, without being overly dependent on any one of them. Our demography (proportion of working population to total population) is among the best in all major economies. Macroeconomic indicators such as inflation, current account and fiscal deficit are in control. The recent slowdown is more cyclical in nature. Government has introduced difficult reform measures such as Goods and Services Tax Act (GST). Real Estate (Regulation and Development) Act (RERA) and The Insolvency and Bankruptcy Code (IBC) and all of them have long term positive implications for the economy. We feel Indian GDP; from current level of ~ USD 2.7 trillion can cross USD 10 trillion in the decade or so. Also, currently Indian corporate profits as a % of GDP are 2.5%, a level seen in 2003. As corporate profits normalize in this cycle and also as the size of GDP grow, investors in Indian equities will earn handsome returns.
There is a general expectation that equity funds could deliver 15% returns over next 15 years. Though we have seen such growth in the past, we all know that past performance does not indicate future returns. In such a scenario, what would be the reasonable return expectation from equity funds over the next 15 years?
We are quite constructive on Indian economy and its growth prospects. Indian markets are bound to do well in the long term and therefore expect >15% CAGR returns over next 15 years. Being an emerging economy, India has a long runway for GDP growth and per capita income improvement. Therefore, there is immense opportunity for all of us to make long term investments and generate good wealth.
ITI Mutual Fund has recently launched its ELSS – ITI Long Term Equity Fund. Since ELSS follows multicap strategy, how ITI LTEF would be different from ITI Multi Cap in terms of portfolio construction and strategy?
ITI Long Term Equity Fund will be investing across market capitalisations. As a discipline, we will have at least 90% exposure to equities at any point of time and generally prefer not to take cash calls. Typical portfolio will include 40-70 stocks.
The portfolio will be having a bunch of companies that meet the 'SQL' investment philosophy. More than 80% of the fund will always be in core set of companies and upto 20% of the fund is expected to be in tactical stocks.
Core set of companies are strong and sustainable businesses with competitive advantages in their respective fields, while the tactical allocation will be towards good companies with significant upside potential but going through temporary problems and at the same time trading at beaten down prices.
The fund will also try to take advantage of the three-year lock-in-period, by having a longer tail of mid/small cap companies, which can potentially give higher returns over longer term.
Overall investment philosophy and stock picking strategy will be the same for ITI Multi Cap fund and ITI Long Term Equity Fund (ELSS). In terms of number of stocks, selection of stocks, stock weightages, portfolio complexion etc. would be different for these two funds. Since LTEF is a very long-term product category, we can nibble good number of small cap stocks with low weightages and thereby the fund will be able to display differentiated alpha generation experience for investors.
New age ULIPs have become very competitive to ELSS. In fact, investors can get better tax benefits in ULIPs. In such a scenario, why do you think ELSS still makes sense to investors?
Mixing Insurance and Investments is the basic error many make. Ideally for investing mutual funds is by far the best platform. ELSS mutual funds are the best funds to invest for long term and it enables the investors to redeem, whenever you need your money post the lock-in period. We strongly believe mutual fund products are highly regulated products, with lot of transparency given by the structure itself. Many highly qualified professional fund managers are managing the mutual funds and the cost to the investor is only the AMC fees which are very negligible in comparison to the long term returns the category of funds provide. In the case of ULIPs the cost structure, hidden charges and fund management fees are not uniform with all insurance companies, so choosing the right fund becomes very tough from an investor perspective.
