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In fact, the man managing a wealth of Rs 3.25 lakh crore at India’s third largest fund house says he prefers debt to equity at this stage, even as many Indian stocks, including dozens of blue chips, have dropped sharply to trade at attractive pricing valuations.
“The shares have not yielded any returns in the last five years until March 2020. Oil is down. Real estate prices have continued to drop in North India for the past seven years. We are in a deflationary period. Only one asset class can make money in this situation: debt mutual funds, ”says Sankaran Naren, ED & CIO, ICICI Prudential Mutual Fund.
“Debt is revalued when interest rates drop and therefore money is earned,” he argued. India’s RBI has drastically reduced interest rates in the past year, by 135 basis points through February 2020, and then by another 75 basis points in March in response to the disruption of the coronavirus.
Interest rates on small savings and fixed bank deposits have been reduced in recent years, exhausting opportunities for Indian fixed-income investors.
“If you deposit money into debt mutual funds, you will get the benefit of reduced interest rates. That is why it is the best asset class at the moment, ”Naren said at a webinar organized by industry body PHDCCI.
Debt mutual funds have delivered an annualized return of 9.90 percent on average over the past three years, data available in the Value Research mutual fund database showed.
India’s mutual debt funds have lost a large portion of their assets over the past fortnight after a leading fund house, Franklin Templeton, closed six credit fund schemes and froze some Rs 30 billion in cash. investors, citing the lack of investment opportunities and the lack of liquidity in the market.
Since then, RBI has opened a credit window of Rs. Rs 50 billion for Indian asset managers to deal with any liquidity shortages should the bailout pressure escalate.
“A credit fund fails when the fund house invests in a company, which is bankrupt,” Naren said.
The average value of the net assets of Indian hedge funds has decreased more than 5 percent in annual terms. Its annualized returns for the past three years were less than 1 percent.
The market veteran still supports credit funds. “For investors willing to bet on credit, credit funds are the second best option to invest in right now,” he said.
Naren says that debt scores on equity from a security standpoint. “Debt is a safer asset purchase option than equity, because you earn money in equity only when you pay the interest on the entire debt,” he argued.
He claimed that most of the mutual debt fund assets are in surviving companies, the top names of India Inc. “If these top industries file for bankruptcy, there will be no India Inc,” he said.
ICICI CIO Pru AMC said equities as an asset class look phenomenally attractive in terms of valuation right now. “But they will generate returns only when this coronavirus thing goes away,” he said.
“Except for basic consumer products, everything else is cheap in this market. But the problem is that we don’t know anything about this pandemic. Previously, I used to open Nasdaq and other global indices to get the pulse of the market, now I am looking at websites to get updates on coronavirus cases, ”he said.
Naren said that if you are a long-term investor, a patient investor, you should put all the money into equity today. “Sectors like telecommunications, pharmaceuticals and energy will be focused when the dust settles. Anything related to telecom will work well in this market. We are going to spend more and more on pharmaceutical space. We are also going to spend more and more online, “he said.
Naren finds real estate in a confused state. “Real estate was a class with wrong prices in 2013. Rent yields are still lower than mortgage rates. If people continue to work from home, then think about what will happen to commercial real estate when the pandemic is overcome, ”he said.
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