Retail participation may be gradual in primary Gilt market

RBI has given its go-ahead to roll out primary Gilt market for the retail investors as one more avenue to sell Gilts at a time when the Government borrowing programme is getting bigger. However, "retail participation maybe gradual in primary Gilt market," says Ajit Menon, CEO, PGIM India Mutual Fund in an exclusive interview with Bizz Buzz

The move is well timed as India is at inflexion point as far as financialisation of savings is concerned. Gilts will present another option to retail savers. Already retail investors participate actively in Govt-guaranteed instruments such as small savings bonds (such as NSC bonds and PPF), which garner substantial amounts each year

The response to the PGIM India Balanced Fund Advantage launch was positive from our clients. The NFO collected Rs 369 crore and the fund is now open for subscriptions. An auto asset allocation product category such as the Balanced Advantage Fund helps provide a reasonable return and reduces the impact of volatility

RBI has given its go-ahead to roll out primary Gilt market for the retail investors. How do you see the competition?

RBI's initiative to allow direct retail participation in G secs (Gilts) is an extremely welcome step to start with. This is also extremely novel and innovative given that very few countries (such as the USA, Brazil) allow their retail investors to directly buy in the primary market from the Central Bank. We are still awaiting further directions in this regard on the operational front. For instance, while investors can buy directly, it would be interesting to know if RBI would also facilitate a sale by operating a special window for retail investors or they would need to offer their bonds in the open market, an institution driven market that determines price setting and operates in larger lot sizes.

Retail participation maybe gradual in our view. The move is well timed as India is at inflexion point as far as financialisation of savings is concerned. Gilts will present another option to retail savers. Already retail investors participate actively in Govt-guaranteed instruments such as small savings bonds (such as NSC bonds and PPF), which garner substantial amounts each year. From the RBI's point of view, this presents one more avenue to sell Gilts at a time when the government borrowing programme is getting bigger as we exit the pandemic.

Retail savings are generally sticky and have a longer investment tenor. To some extent, this should have an impact on bank deposit growth. However, given that the economy will reflate over time the pie tends to get bigger and the bank deposit market is substantially bigger at almost Rs150 trillion and shouldn't face a significant impact. Over time, we expect this route of allowing direct retail participation in gilts to become a long-term stable source of funding for G secs.

ETFs are the flavour of the season. Your view.

Investing in ETFs is passive way of investing. In active management, whenever we are buying a stock, lot of due diligence and research effort is involved to understand the risks involved in that particular company, business and management. When you are investing in ETF, you are buying a stock because it is there in a particular index. It's true that ETFs are gaining traction and have definite advantages for certain set of investors like pension funds.

A few other points that are relevant while considering active funds vs ETFs: frontline indices do not capture stocks in emerging sectors. For example, NIFTY did not have any insurance company till recently. Sector rotation - Winners keep rotating. The late 90s belonged to the IT sector, the 2003-07 rally was all about infrastructure (and real estate), 2008 till now, the Consumption sector led the way along with Financials. Interestingly, Consumption + Financials was just 20 per cent of frontline indices in end 2008 compared to Cyclicals (Infra + Capex heavy sectors) at 64 per cent. An active fund could have easily done the switch from capex heavy to Consumption + Financials, but passive is stuck with what's there in the index. Last 2-3 years saw an unprecedentedly narrow market where bulk of the index returns came from top 5 names, which has favoured ETFs, hence the current traction.

Capital market is currently in consolidation mode after crossing magical heights. What will be your advice to the retail investors?

After a tumultuous year 2020, things are looking quite positive for market as three key factors Liquidity (FII and retail buying), corporate earnings growth and sentiment are in favour of the current rally. Though we remain positive on equities as an asset for wealth creation over medium to long-term, it is advisable to invest in traches (preferably SIP route) by retail investors. Correction and volatility cannot be ruled out after such strong rally.

Your view on debt MF products!

We believe that debt funds should be an essential part of any client's portfolio. India is a country of savers and debt funds provide options like liquid and overnight funds that can fulfil this. One other aspect of mutual funds is the features that can help clients manage savings conveniently. For instance, our PGIM India Insta Cash fund has the feature of instant redemption, up to a limit of 50 thousand per day, from liquid funds that can be smartly used for accessing your savings when required.

Secondly, given the interest rate scenario currently, we are recommending clients to stay invested in the shorter-term funds. Transparency is key and we are one of the first fund houses to declare portfolios daily on our website for all our shorter-term funds.

PGIM India MF India has recently unveiled Balanced Advantage Fund. How is it doing?

The response to the PGIM India Balanced Fund Advantage launch was positive from our clients. The NFO collected Rs 369 crore and the fund is now open for subscriptions. We believe that this is an appropriate product for clients who do not want to time their entry or exposure to the market since the underlying model based on valuations will do it for them. An auto asset allocation product category such as the Balanced Advantage Fund helps provide a reasonable return and reduces the impact of volatility. We already had an auto asset allocation facility at PGIM India that has done well over a period of time and we believe therefore that our new fund that leverages the key aspects of the same model will do well for investors in times to come.

Any new products in the offing?

We would like to make sure that we are covering the essential categories that investors would want for their investment needs. From that perspective we are considering new fund launches in a few categories like Large & Mid Cap as well as Small cap. We will also be looking to launch a Retirement Fund.

What is the aim of PGIM India five years down the line?

The aim will always be to stay relevant in the industry. We want to focus on maintaining consistency in the performance across all our funds. We believe that we will be among the top 20 fund houses in the next five years.

Any plan to get listed?

We are a 100 per cent subsidiary of PFI, which is a listed entity in the US. We do not have any plans of listing locally.