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What are the learnings from US mutual industry that we can apply in India?
The US MF industry gives its investors a variety of funds to choose from and provides more flexibility for investors which can be incorporated in the Indian MF industry. In India, the investor base is continuously moving from real assets to financial assets due to efforts of the regulators. This trend will accelerate the growth of the MF industry as well.
Many financial advisors in India have been traditionally advising equity funds as they offer high growth and returns. What is your advice to financial advisors and mutual fund distributors when it comes to asset allocation?
In the recent times, we are observing that bonds have become a strategic asset for investors globally. Earlier, bonds used to have a negative real interest rate, so it wasn’t a very exciting asset class to invest in. But now real interest rates have risen globally.
Indian stock markets valuations have been quite robust so the real yield in equity and bonds have become very close to each other signifying that bonds are going to have good returns in the coming times.
Even though equity will still outperform but the difference in yields between these two classes will be reduced. Thus, re-allocation of capital is expected from equity to bonds.
What are the practical ways of following asset allocation given that client goals can keep evolving?
Asset allocation depends on the degree of risk aversion of the investor, how much risk can they take.
In India, FDs, corporate deposits and government bonds offer good returns and hence, there is more allocation to these assets. From a distributor’s perspective, his prime job is to de-risk and diversify this fixed income corpus. So, as an outcome, equity is a natural choice.
Today, financial advisors are also doing a very holistic reporting and have various tools to study their investors. I would nudge them to continue to do so.
In US, we have target rate funds that dynamically allocate assets as one grows older. For example, my daughter has invested 85% of her investment in equity and 15% in bonds due to her age and as she grows older, the equity assets will automatically move to fixed income.
Why should financial advisors look at private credit funds?
Private credit funds in United States have only been for highly wealthy people but now the regulators feel that even retail investors should look at it for planning their retirement. This is due to the fact that there is a potential higher return in private asset category though it is riskier.
A lot of mutual funds are trying to allocate their assets in private credit funds in U.S. The challenge for MF industry is that they are illiquid assets, so some change in regulations is required. But the trajectory is to start including private credit funds in the mutual funds for average participants in the U.S.
But this concept of private credit funds is relatively new, it started after 2009 and hasn’t been tested in a bad recession situation so though it offers some good opportunities, we have to keep an eye on how it develops.
What is your outlook on the US economy and US Mutual fund industry?
We believe that 2024 is going to be good growth year for U.S. We expect inflation to be about 2%-3% and GDP growth at 2%. We don’t expect any rate cuts by the US Fed, so a period of moderate inflation and moderate growth is expected. We are not as optimistic as India but we are decently optimistic.
Coming on to the MF industry in U.S, most investors invest in mutual funds for their retirement through 401(k), which is a retirement savings plan. But now the view is that this program benefits the wealthy more than the average income person. So, the thought of changing this retirement program can have ramification in the U.S MF industry.
Also, mutual funds in U.S are shifting towards ETFs due to the tax benefits it offers and the flexibility and convenience it offers.
What are the major trends you see in Indian economy?
We expect India to see a GDP growth of 6% to 6.5% with moderate inflation, which is better than many countries of the world. With continued macro stability for the past few years, India particularly has become lucrative to global investors. Also, India is growing with stability and has shown an improvement in tax to GDP ratio and fiscal deficit.
