Bloomberg Quint The Mutual Fund Show with Mr.Tarun Birani

Niraj Shah, BloombergQuint asks Tarun Birani, Founder & Director at TBNG Capital questions relating to key areas of concern for mutual fund investors. This conversation addresses issues such as, how should investors cope with the falling economic growth and slowdown in sectors and what to do about investments that have been made in Mutual funds that have exposure to these sectors?

While the damage may seem to have been already done. A well-diversified mutual fund’s exposure to these sectors is comparatively low and so exiting such funds wouldn’t make much sense. Even most fund managers are bearish towards these particular sectors at the moment considering their tepid growth. However, it wouldn’t be advisable for an investor to get into schemes that are related to these sectors despite their low prices, rather diversified funds would be a better choice in the current market scenario.

Debt funds which are technically more attractive due to their stable returns are currently not so appealing to the general investor due to some unfavourable taxation norms. Once this issue is fixed, investors should look into these schemes as they can provide a fixed rate of returns and remain unaffected by market volatility thereby increasing the secure returns of your investment portfolio.
Investors also need to keep in mind that large fund houses are no longer appealing to fund distributors due to their lower brokerages and commissions which encourages advisors to recommend smaller fund houses. Thus, it is necessary to ascertain how independent is the advice that you are receiving from your financial advisor.

Niraj Shah, BloombergQuint asks Tarun Birani, Founder & Director at TBNG Capital questions relating to key areas of concern for mutual fund investors. This conversation addresses issues such as, how should investors cope with the falling economic growth and slowdown in sectors and what to do about investments that have been made in Mutual funds that have exposure to these sectors? Read on for the complete interview:

Q: A lot of people have been talking about the kind of correction that has happened into, let’s say auto, that one pocket that’s got the eye of the storm because it created a lot of wealth, and then suddenly it has gone down in the last 18 odd months. There is no stopping because the response around whether this is the end of a down cycle or the beginning of the potential upcycle is not there, because even the auto companies are not able to say that. So I would not believe anyone right now.
What to do in such a scenario with funds that have got a higher exposure to some of the auto stocks? Tarun I could start with you?

Tarun Birani: Auto if we look at from the NIFTY perspective, NIFTY has approximately 5% weightage in the auto sector. When we look deeply at the mutual fund’s equity schemes, we have seen some schemes have a maximum of 7/8/9%. So I don’t see most of the fund managers themselves are very bearish about the auto sector which is clearly visible and there are 2-3 bell weather stocks in the auto segment in the large-cap side in the Mahindra & Mahindras of the world, Marutis of the world which at one point of time were trading at very rich valuations. Looking at the rapid growth from the last two-three quarters and the continued negativity due to the concerns like the NBFC sectors there is no credit available to the last mile customer who would be looking at buying an automobile. So, that is one reason; and the second big reason had been because of the increase in prices because of the BS6 norms as well as the insurance and more. The auto prices are moving up dramatically. Due to that, on the overall demand side, if we look at the last 2 quarters we have seen most of the auto companies delivering almost 20 to 30% negative growth numbers, degrowth is happening there. So looking at all this I see that auto will continue to do badly for the next two to three quarters and any schemes and funds which are overweight on auto need not be a part of your portfolio.

Q: Why can’t I be proactive and do something about it and therefore from the perspective of somebody who wants to do something about it and doesn’t want to have a basic formula of asset allocation and therefore I will wait, let me ride. If I want to make the most of this, from some of these funds is it better to get out even now?

Tarun Birani: My sense is as Amol has rightly mentioned, the damage has already been done in most of these schemes. And I think no point since they are sectoral schemes, I’m sure if anybody has invested through the advice they must have just given 5% or 7% of the portfolio in such schemes not more than that. So I’m sure that part of the weightage, anywhere NIFTY also has an auto as an overall. Some of them have 5%. But larger, in your portfolio, would not be more than 25%. I’m assuming, most of them have not gone and invested in 30-40% of their portfolio. If that is the case, then I think it is a worrying sign, they should get out of it. Other than that, I don’t see any problem.

Q: What does one do with schemes that have a slightly higher exposure to IT?

Tarun Birani: So, if you look at largely IT as a part of the Index is approximately 15-16% of the portfolio and I think most of the schemes if you look at, portfolio varies between 15 to 20% of the portfolios. I think IT as a sector to my mind is more neutral right now and more defensive. Most of the fund managers would be looking at Pharma and IT as their saving grace at this point in time. So, I think one can continue with that no need to look at it much more deeply.

Q: The truth is that we have kind of seen apparently some state associations at large, large bodies saying we won’t be doing this. Ethics is one good thing to speak about but we are not seeing that in practice?

Tarun Birani: So, I have a slightly different perspective, the diagnosis of this problem, what you’re talking about Basically started with the TER changes. With the TER changes, a lot of large fund houses become unattractive to a lot of distributors, due to the reduction in the rates, etc. Due to that, I think the smaller fund houses suddenly become attractive to a lot of distributors, and due to that, we have seen a lot of distributors, the straight bodies, what you were talking about, I think they found merit in banning something like this. I don’t know the details of it but I think prima facie it looks like, because of the reduction in the brokerages and the distribution commission there has been banning. A larger solution globally, I think this independence part is always a question mark, that whatever is advised to the client how independent that advice is, I think for that the conflict of interest needs to reduce dramatically wherever the conflict of interest is less, I think the investors will earn more in that exercise. So RIA, as a concept Registered Investment Advisor as a concert which has been adopted by India in the last 5 years, we are seeing a lot of emphasis around the suitability exercise; wherein any advice which is disseminated is completely independent of what you’re going to earn. If you’re earning anything, that disclosure any which way needs to be made, but apart from that try going through the more direct route, I think the direct route helps in earning most of the earnings directly from the customer rather than earning from a manufacturer. That again puts the investor first concept into place, and I see going forward, next 3 to 5 years we are seeing in the US and UK this is changing dramatically and India is also moving towards that. This problem, what you’re saying is the banning and all that will not arise if investors are using the services of RIA.

Q: You think, by the virtue of awareness, the investors will find their way? If I want an HDFC AMC(Asset Management Company Ltd) product and if my state association or my advisor is not giving it you think I will go onto the other products.

Tarun Birani: No, I don’t think so. It is a prescription based medicine. Not everybody has the wherewithal to understand this. So you need somebody qualified to talk about it. And if the qualified person is not talking about it, investors can be easily taken for a ride.

Q: The tax arbitrage between debt AIF’s and Debt mutual funds; arguably now for large HNI investors, nevertheless, it might impact some others as well. What are your thoughts out here?.

Tarun Birani: So, let’s understand the AIF structure. AIF’s Structure in India is more like a trust structure and due to this trust structure, the highest tax rate applicable for more than 5Cr kind of taxation structure is 42%+. So, compared to the dividend distribution tax of 29% I can see clearly a 13 to 14% tax arbitrage available. So, a 15% return earned by a let’s say a debt AIF end of the day post-tax returns would be roughly 8 to 8.5 returns compared to, so it makes it very unattractive for anybody to look at debt AIF. So I feel this is a challenge in the current market due to this unintended consequence of what the finance ministry wanted but what happened actually turned out very negatively. So I hope they change it because I don’t understand at the end of the day debt mutual funds or a debt AIF are going to invest in a debt structure only. So, they need to have parity in terms of taxation, so this arbitrage will exist for the long term.