GANESH MOHAN, CEO, Bajaj Finserv Asset Management, says when the interest rates correct in the US, yield will become an important concern for foreign investors, which will then start looking at the Indian markets a lot more. “Whatever the US does, pressure will be higher on the RBI to do a similar action.”
In an interview to HITESH VYAS and GEORGE MATHEW, Mohan, who also worked as Partner and MD of Boston Consulting Group, says the risk adjusted returns that investors could get in liquid funds or even in any kind of debt funds, could be higher than savings accounts of banks. Excerpts:
On the equity side, there is a perception that most of the good companies are already overvalued. What is your view on it?
I would say that perception is probably true only in parts. If you look at the market across large-cap, mid-cap and small-cap, there has been a certain run-up in the mid and small-cap categories. Even then, I wouldn’t say it has gotten into bubble territory yet.
If I look at the ratio of small-cap to Nifty, it’s probably about 20 per cent above the long-term average. In the large-cap space, we are in the fair value territory. A lot of good quality large- caps have seen a time correction for two years and so, prices of many of them have been more or less at the same price level for the last couple of years. Their earnings have grown 20-25 per cent on a yearly basis, which means that their valuations have come to attractive levels. That’s why we have launched large and mid-cap funds with the philosophy to invest in companies that have a moat around them. We believe that opportunities still exist in the market. As we start seeing the interest rates correct in the US, yield will become an important concern for FIIs, which will then start looking at the Indian markets a lot more. They have been retreating, but at some point, they would come back and invest in large and well-established companies.
Interest rates are likely to fall provided the RBI manages to bring the inflation down to the 4% target. In that scenario, what should debt market investors do?
There are a couple of factors that will play an important role. First, the spread between the rates in the US and the RBI is at historical lows. So whatever the US does, pressure will be higher on the RBI to do a similar action. Second, India’s inclusion in the global bond indices will help bring in at least $50 to $60 billion of flows. These flows will come in the 10-year g-sec, which is the most liquid fixed-income security. Today, if you look at the yield curve, there is not much gap between the five-year and the 10-year rate. This, ideally, should not be the case as there has to be a certain reward for taking longer tenure risks.
So, we believe that the three to five years space is a very interesting one for investors to be looking at from a fixed-income perspective. When the 10-year corrects with all that money coming in and with the US rates correcting, there will be a lot of pressure on the 10-year g-sec rate. Obviously, the three and five-year g-sec rates would also see correction. With that kind of tenure horizon, we believe there is a significant mark-to-market opportunity for investors. Of course, the taxation structure has changed, so they will have to probably be cognizant of that and take that into account.
How do you see the domestic economy going forward?
I think a lot of the structural underlying drivers are in place. Over the last few years, we have seen reforms such as GST, Aadhaar, UPI, bank clean-up and RERA. Due to these, the financial infrastructure is now world-class in India. It has also allowed for a lot more innovation. The railroad has been built very well. A lot of infra push has been happening from the government side. The private sector needs to start coming in, but that will happen over a period of time. The country also has a very big advantage of demographic dividend.
Along with the economic growth, we see that the AUM growth in mutual funds is also very rapid. So, we see a very good period for the mutual fund industry coming up in the next six to seven years. I think from a growth perspective, I don’t see a better market than India at this point in time.
The flow of bank deposits into mutual funds has increased. Where do you see this in the next five years?
I think that will accelerate. We feel that mutual funds are a very good alternative to savings accounts in the market. Based on past category performance, the risk adjusted returns that investors can get in liquid funds or even in any kind of debt funds, could be higher than savings accounts. Today, there is about Rs 24 lakh crore sitting in retail current accounts and savings accounts. At a conservative estimate, investors are losing probably close to about Rs 50,000 crore in interest.
What is your outlook for the market for 2024?
The market has many different parts. From a perspective of large, mid and small caps, we have seen that some parts of the market have certainly run up. They are not in bubble territory yet and the momentum is still very positive. Large caps are pretty much in a fair value zone, given where earnings are and the price-to-earnings ratio. The small cap category is so large that you will find pockets of value even there. So, we see that the market is certainly at a fair value with positive momentum at this point of time.
Near-term risks do always exist. It may come from any different source – geopolitics uncertainty or political events. We believe that most of the risks come from external sources. Domestic risks are not that significant. The biggest risk was the election, which I believe that nobody in the market is pricing that there will be a regime change.
The momentum and sentiment can change very quickly but in the long-term, we are very positive in the India story.
You are a recent entrant into the mutual fund space. How has your experience been so far?
It has been six months and our experience has been fantastic. This is the first time that the group has entered into this business. For us, the decision was whether to start organically or buy a company. There were quite a few opportunities in the market and we looked at all of those. Of course, an inorganic gives you a lot of ready-made – a team, track record, an AUM and distributor relationships. But we decided not to do that because when you buy a company, you also buy the way how it is operating, its investment strategies and its processes. We didn’t want to come in with something that we were just checking a box with. As Bajaj Finserv, we try to do something in a unique and differentiated way. So we decided to go the organic route.
What is your growth strategy?
For us, it’s a completely open playing field. We decided that we would be a diversified fund house. On the equity side, we will bring funds on the active side, which are focused on outperforming the underlying passive funds.
On the fixed income side, as a fund house, we tend to be very conservative in terms of risk approach and we don’t take a lot of credit risk.
The way we are planning to deliver returns is by modelling the yield curve. We have built a model on 10-year government security (g-sec), with a 70-75 per cent accuracy to predict the direction of g-sec.
