Interview with MD and head of asset management in India, Deutsche Asset and Wealth Management

As markets grapple with uncertainty and slowly come to terms with the possible winding down of quantitative easing by the US Federal Reserve, Suresh Soni, managing director and head of asset management in India at Deutsche Asset and Wealth Management tells Ujjval Jauhari that he is not worried about FII withdrawals from the Indian bond markets. He suggests that investors should consider short-and medium-term bond funds for investment. Edited excerpts:

What is your take on US Federal Reserve’s (US Fed) statement and its impact in the long term?

Ben Bernanke’s statement clarified that QE (quantitative easing) withdrawal is likely – sooner and faster and earlier than expected. Post the statements, we have seen a surge in bond yields globally and widespread anxiety about the fate of emerging markets. From India’s perspective, given our large CAD (current account deficit) and dependence on capital flows, this poses some near-term headwind for equity and currency markets. However, moving beyond immediate term, a stronger growth in the world’s largest economy is good for world economic growth. This will certainly bode well for Indian exports and can be conducive for stronger growth in India as well.

What is your view the rupee and its likely impact on the fortunes of India Inc?

Post the US Fed statement, there has been pressure on emerging market currencies including the INR. While there may be near-term volatility in INR, we note the improvement in the current account deficit (CAD) data for January - March 2013 quarter to 3.6 per cent of GDP from a record 6.5 per cent of GDP in the September-December 2012 quarter. There are recent reports that gold imports have begun to moderate. This, coupled with expected improvement in external demand, can help in keeping CAD in check. All this can have a beneficial impact on rupee in the medium-term.

In your opinion, how good or bad is the new FII registration process and will it help encourage them invest more in India?

We welcome the move by Sebi in terms of easing FII registration norms. It will certainly help increase FII participation in Indian markets.

What is your view on impact on bond markets and bond funds?

Over last few weeks, we have seen some withdrawal by FIIs (foreign institutional investors) from Indian bond markets. I would, however, not be too worried about such withdrawals as domestic institutions play a much bigger role compared to the relatively small holdings by FIIs. Over past several quarters the Reserve Bank of India (RBI) has been cutting rates in order to boost the local economic growth. The recent depreciation in the rupee and its consequent impact on inflation weakens the case for rate cuts in the immediate-term. We, however, see a possibility of a 25 - 50 bps (basis point) rate cut over the year or so.

So you see more traction in terms of inflows continuing in the bond funds?

Yes, mutual funds offer a range of products in fixed income. Over the last few years, even as equity markets have remained volatile bond funds have generated good returns for investors. I expect continued investor interest into bond funds and would recommend investors to consider short-and medium-term bond funds for investments.

How much importance do you see for equity investments holding and how should the investors allocate to the funds?

Equity funds play an important role in long-term wealth creation and as such should find a place in investors’ portfolio. Investors should consider investment in equity in a staggered manner and with a long term horizon. Fixed Income funds should form a part of the core portfolio of investors. For most of the immediate needs as well as well as for investors who are not willing to take volatility of equity markets, debt mutual funds are a good option. Here again, investors can consider liquid funds for their near-term liquidity needs and short and medium term debt funds for their medium-term investment needs.

How much importance at current juncture does Systematic investment plans (SIPs) play?

Do you see traction continuing? SIP plays a key role is making savings a habit and ensures investments in a disciplined way. SIPs also help taking care of volatility and have generated good returns over the long term. Apart from considering SIPs in equity funds, investors can consider SIP’s for investing in debt funds as well.

What should be investors approach towards investment in gold or related funds?

Over the last decade, gold has generated impressive returns for investors. The recent drop in prices is a crude reminder for investors that like any other commodity Gold can be volatile too. In India, investors have used the yellow metal as a hedge against inflation. In the current environment, I would urge investors to consider fixed income funds and Inflation Index bonds. Do you recommend any other type of funds for investors? Investors can consider Hybrid funds in the current uncertain environment. These funds make predominant allocation to fixed income with a smaller portion, usually less than 20% getting invested in equity. Of late, we have seen some funds which use equity options instead of direct equity. These funds can help investors achieve a good participation in equity market with relatively low risk to capital due to pre-dominant allocation to fixed income.

What are the challenges that you as a fund manager managing Mutual funds faces?

The challenges are to make people aware about mutual funds. Also, investors need to have the right time horizon and a clear understanding of risk-reward of each product. Mutual funds offer a comprehensive range of options serving conservative investors as well as investor willing to take equity risk. Investors need to invest in line with their risk appetite as well as time horizon. Mutual fund penetration needs to increase. Investors have to understand that it is a well regulated way of making investments rather than going and investing into unregulated schemes in a bid to make quick money. Recent steps by regulators towards market expansion are welcome and we see the increasing awareness to lead to better understanding of mutual funds.