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WF: What is the core thesis on your recommendation of Equity Income Fund in the current market environment?
Naren: For any conservative investor who wants to invest in dynamic asset allocation funds ICICI Prudential Equity Income Fund (EIF) should be a part of their core portfolio. This is because the scheme has a unique investment proposition that aims to generate returns from equities, arbitrage opportunities and fixed income securities. All this coupled with tax efficiency.
The other added advantage is that by investing in this fund, one can gain from the benefits of an asset allocation fund which helps maintain measured equity levels based on market valuation. This enables the investor to stay invested in equities thereby participating in the rally.
Additionally, if an investor wishes to switch to pure equity funds when opportunity arises, the investor can easily do so as there is no exit load on switches to open ended equity schemes. In the whole process the dilemma whether to invest during rallying markets is resolved and there is no left-out feeling if markets keep on rallying higher.
Over the past two years, this approach has played out well, as can be seen in the graph given below.
In the above illustration an investment of Rs. 10,00,000 in ICICI Prudential Equity Income Fund in Dec 2014, and then switched to ICICI Prudential Select Large cap Fund (EIF strategy graph) when markets corrected, has grown to Rs. 12,41,478.
(Past performance may or may not be sustained in future)
WF: Equity allocation in your fund has been drifting down over the past 12 months, in response to rising valuations, which also perhaps signifies lower near to medium term return prospects. With a good part of the bond rally also now behind us, should we be gearing for a spell of very modest returns from the Equity Income category?
Naren: Equity allocation is a function of market valuation. One year back, the markets were relatively cheap and so the equity allocation was relatively higher. The Scheme uses an in house asset allocation model (Price to Book Value Model or P/BV model) to manage the equity levels. Since there is no market cap/ style bias, the gross equity exposure will be in the range of 65 to 75%. However, based on the market valuations net equity exposure will be maintained between 20 to 40%.
In short, EIF offers relatively stable returns and allows equity exposure with the benefits of equity taxation norms. This setup works well for a conservative investor. So, even if someone were to feel left out in the rally seen over the last six months and is in a dilemma whether to invest now or not; such individuals can opt for this fund and use it as a gateway to approach equity markets given that valuations are not very cheap.
WF: Is it reasonable to assume that this product will be able to beat fixed deposit returns on a pre-tax basis or will the benefit come in only when you factor in the beneficial tax treatment of returns?
Naren: If an investor has remain invested in this fund for a reasonable timeframe, then the returns will be reasonable and investor may get good investment experience.
WF: How should this fund be positioned and who would be the key target segments of investors for this fund?
Naren: This fund is prudent for conservative investors who seek to take benefit of equity and debt for three years and above investment period. It offers potential for growth with dual advantages of relatively stable income and tax efficiency.
WF: Can an SWP on this fund be promoted as an effective retirement income solution that competes well against annuities and fixed deposits?
Naren: SWP option remains a feasible proposition. Unless there is an adverse movement in equity or debt market, the returns generated may be reasonable and is an apt solution for wealth creation for a long term investor.
WF: What has been the debt strategy given that the best part of debt rally is already done?
Naren: As a means to get the benefit of the opportunities in debt side, we have reduced our exposure to GSec and have increased our holdings in corporate bonds which may provide benefits of carry and actively manage duration.
WF: Is your increased exposure to telecom sector a contra buy at a time when Reliance Jio is putting intense pressure on industry margins?
Naren: Yes, telecom is a contra call as we believe that it has become a basic sector for every consumer. Surely, there is disruption happening and prices may come down; we view this as an opportunity to add to the sector given the attractive valuations.
Mutual Fund investments are subject to market risks, read all scheme related documents carefully.
The information contained in this communication is only for the reading/understanding of the registered Advisors/Distributors. All data/information used in the preparation of this communication is specific to a time and may or may not be relevant in future post issuance of this communication. ICICI Prudential Asset Management Company Limited (the AMC) takes no responsibility of updating any data/information in this communication from time to time. The AMC (including its affiliates), ICICI Prudential Mutual Fund (the Fund), ICICI Prudential Trust Limited (the Trust) and any of its officers, directors, personnel and employees, shall not liable for any loss, damage of any nature, including but not limited to direct, indirect, punitive, special, exemplary, consequential, as also any loss of profit in any way arising from the use of this communication in any manner.
Nothing contained in this communication shall be construed to be an investment advice or an assurance of the benefits of investing in the any of the Schemes of the Fund. Recipient alone shall be fully responsible for any decision taken on the basis of this document.
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Fund Focus: ICICI Prudential Equity Income Fund
