He attributed his aversion to taking credit risk in such funds to the absence of proper hedging mechanisms in India. For example, there is no an active market for credit default swaps, which would allow investors to insure themselves against the possibility of default. While mistakes on predicting interest rates can still be corrected, defaults are harder to deal with.
“If our view on credit goes wrong, there is no exit opportunity,” he said.
The rise of alternative investment funds is a positive in terms of creating pools of capital, which can pick up distressed debt, according to him, but it may take some time for things to be in place.
In the absence of such mechanisms which fund managers in more developed markets
take for granted, is experience important? Especially in an industry where serious private sector players are relative entrants?
As a young fund manager still in his mid-30s, he points out that the private sector has been around since the 1990s. And that these mutual funds
have had a decent track-record across cycles. Indeed, industry experts point out that bad loans account for less than 2 per cent in mutual funds; though it is far higher in banks (although banks also lend to riskier segments like small and medium enterprises, unlike the mutual fund space).
While Mittal believes that the time spent in the market is a positive and can be helpful, there is no magic number of between 30 and 35 years at which to set a minimum threshold for experience, according to him. Evolving technology and changing market structures may actually favour people who have their ears to the ground and are deeply involved in day-to-day fund management. Having some experience of different periods of liquidity and macroeconomic cycles can help. But, after a while, experience becomes just a number.
“I don’t think just adding number of years beyond a point…(says)…anything about a person or a fund.”
Meanwhile, he expects that the Reserve Bank of India
(RBI) will cut interest rates in light of low inflation and concerns over India’s economic slowdown. Both domestic and global drivers of growth have been faltering. India has been facing a demand slowdown, even as the rest of the world has been struggling with concerns over a trade war. “We are constructive on rates and expect RBI
to cut rates further,” he says.
He expects at least a 40 basis points rate cut (a 100 basis points is one percentage point). This would mean that the repo rate, which is the rate at which banks borrow money from the RBI, would touch around 5 per cent. It is currently at 5.4 per cent, the lowest since 2010.
Like the RBI, he, too, seems ready for a bumpy ride. Mittal has been managing the corporate bond fund since January 2016, and the banking and public sector fund since May 2017. A closer look at his portfolio shows that the corporate bond fund has continued with quality names, including government-backed entities and premier private sector companies among the top holdings. The other fund is also similarly populated.
Mittal says he found bungee jumping scarier than skydiving. Bungee jump is done alone. Skydiving is done while being strapped-in with an instructor. One is more comfortable when someone is there for the ride according to him. There is a greater confidence that the expert will take care of any nasty surprises. After last year’s performance, his investors may well agree.