The Arbitrage Fund aims to provide relatively risk free returns without taking any directional views on equity markets

The Coronavirus pandemic has sent markets round the world in a free fall, with the NIFTY falling over 20% from its last peak month. What is your outlook on the Indian equity markets in the short and long term?

We believe, that rather than taking a view on the market, as an investor one should always focus on what is in the price. As long as the quoted price is comfortably lower than the underlying value, one should remain invested.

Also, it is important to understand the overall context of the situation. We are currently witnessing unprecedented situation which has resulted in the lockdown at the international and domestic level. However, in the last few days the lockdown is being steadily relaxed across the world.

The impact of the same on the economic activity will certainly be there and will also be reflected in the corporate earnings. However, the steps by RBI and the govt. will help to reduce the impact of the same.

Further, last year’s good monsoon and expectation of normal monsoon should support the rural economy. At the macro level low interest rates and lower oil price is also positive.

From the corporate earnings point of view, FY21 earnings will be certainly be erratic, but we believe assuming recovery in 2HFY21, that FY22 earnings numbers should be relatively unaffected.

We find market valuations to be attractive on a historical basis, considering: (a) Market Cap-to-GDP is at ~55% currently, the level it was during GFC, (b) The bond and earnings yield gap is currently the most favourable in a decade. At the current Index levels, even if we assume a 15% cut to the consensus earnings, the Nifty will still be at reasonable valuation of less than 14x on FY22 basis.

What are your views on the overall Rs 20 lakh crore fiscal stimulus of the Government? Will it be sufficient to revive economic growth?

It is important to note that the Indian economy was already on the slower path before the COVID pandemic and that was further impacted due to lockdown impact.

The recent measures taken by the RBI and the government will help to reduce the impact to some extent.

RBI’s intervention to ease liquidity and give regulatory relief for the system is positive. Also government measures to help economically weak section along with MSME’s is constructive. Given the revenue constraints, fiscal deficit may widen in the interim though.

While there are some direct cash/income transfer given in the package. Most of the announcements concentrate on structural reforms which are likely to benefit in medium to long term.

Through these measures government has addressed the smooth functioning of supply but demand revival will still be required, in our view. As articulated above, lower oil price and interest rate will be helpful in the overall economic revival.

What are your views on the various monetary policy steps taken by the RBI including the latest 40 bps repo rate cut?

In the fight against corona virus crisis, RBI has been very proactive in cutting rates, injecting liquidity and taking steps like LTRO/TLTRO to ensure improved flow of credit to MSME and NBFC sector. These steps ensured that markets quickly recovered from the dislocation witnessed in March during a global sell-off across asset classes. Given the challenging fiscal situation and the current credit crisis that has been there since ILFS default, markets are still tentative and somewhat on guard. While a total disruption has been avoided, it will still take some time for markets to recover fully. Good news is that the recovery process is on and some sense of stability is returning

There is a lot of nervousness among fixed income investors and reports of large scale redemptions from debt funds in the last 2-3 months. What is your advice to existing debt fund investors and other investors who want to invest in fixed income?

Though we Mutual Funds do write that Mutual Funds are subject to market risk, it is only when the risks unfold that people start understanding the depth of the risk involved. At this moment there is a distinct flight to safety which is natural but not rational. The risk associated with each category of Debt Mutual Fund is different and it is never wise to paint the entire basket with one risk meter. One should check the category one is invested in and if things are alright, there is no reason why one should redeem(unless one has a requirement of funds).

What is your general guidance to investors on how to manage asset allocations in the current situation?

It is a known fact that the main reason for wealth creation is asset allocation. It forms the core of every financial plan. The success of a financial plan depends on the ability of the investor to hold to the asset allocation always. This is one of the main jobs of an advisor. In such times like now, it is easy to get swayed away and get tempted to change the asset allocation. But investing is all about discipline. Some portfolios could give a chance of rebalancing and one could look at that option looking at the change in values due to market movement.

With increasing credit risks, what are your views on arbitrage funds as low risk investment options?

Actually it would be wrong to discuss credit risk and arbitrage in the same breath. They are two different categories catering to investors with different risk profiles and investment needs. The Arbitrage Fund aims to provide relatively risk-free returns without taking any directional views on equity markets. The scheme may invest a small portion in high quality low duration debt securities or money market instruments. The margin money requirement for the purposes of derivative exposure will be held in the form of term deposits, cash or cash equivalents.

Why is Mirae Asset launching an Arbitrage Fund now?

We form a rationale for the fund and not for the launch. Our past record says that we have launched a fund when we have got the approval for the same. The NFO has always been a starting point for the fund NAV and our real asset build-up happens with the track record. We would take the same route for the Arbitrage Fund too. We have our Equity Savings Fund, wherein we have demonstrated a 1 ½ year track record of managing Arbitrage portion (30-35% has been allocated to arbitrage in that fund), which we will leverage on for this fund.

We are happy that we are going ahead with our business plan and launching it in spite of the truncated environment. We do believe that we have the capability of building good track record for our Arbitrage fund and that is the reason behind the launch.

Arbitrage is currently seen as the “last refuge” for parking short term surpluses, in an environment where investors are scared of any form of corporate credit. Are arbitrage funds therefore only a tactical business opportunity or a product you can build to scale over time?

Mutual Fund Investments are subject to market risk, read all scheme related documents carefully.