Fiscal health, low borrowing costs to drive growth: A Balasubramanian

Time of India

22-05-2025

"If you are age of 20, assuming you live for 100 years, 80% of your asset should be in equity. As you start progressing in age, your
equity asset classes
should come down and
fixed income
asset class should go up," says
A Balasubramanian
, MD & CEO, ABSL AMC.
But what as per you is the ideal asset class allocation because what we are seeing is that Indian
markets
, of course, are finding a bit of a resilience amidst the global turmoil, other than that the gold was actually losing its shine, but once again making a comeback. So, as per you how should investors place their bet?
A Balasubramanian:
So, there are traditional model. My own belief is a simple traditional model easy to understand, it is more sustainable, which is nothing but 100 minus your age should be in asset in equity.
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If you are age of 20, assuming you live for 100 years, 80% of your asset should be in equity. As you start progressing in age, your equity asset classes should come down and fixed income asset class should go up.
But at the same time, fixed income also should be looked at from the point of view of inflation against how much you earn. If the inflation is about 5%, if your interest rate is coming 5%, there is not worth keeping money in fixed income, it is worth actually putting money in equity because high inflation means somebody is taking your money, so that is the way asset allocation should be looked at.
And gold as an asset class, given the fact now it has become a good asset class, silver has become asset class. So, as long as, there is a sellable value, you can go to the market, you can sell anytime, there is a price which is fixed on a daily basis.
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So, therefore, it becomes also one of the asset class that can be owned. So, therefore, from a broader investment point of view, 50% to 60% asset class will always be in equity and 35% to 40% asset class will be in fixed income, you need earning assets at all point of time, then actually rest 20-25% comes in the gold and other asset classes.
But fortunately, the mutual fund side, as mutual funds also progress over a period of time, we also moved away from just simple product-based selling to a solution-based selling.
So, today if you look at the whole hybrid asset classes such as balanced advantage fund or multi-allocation fund or multi-cap fund, all of them actually generally drives the nature of asset associations you invest in equity depending upon where the market is, higher equity depending upon the bullish view that you have on market and lower equity depending upon how bearish view you have on the market.
These dynamic asset association which happens in balanced advantage fund, a dynamic asset association happens in multi-cap fund moving between largecap to midcap to smallcap and also having gold in multi-asset allocation fund. So, such kind of product actually gives the natural solution to the investors.
You do not need to break your head and for you to do a planning of how much should go in equity, how much should go in debt that responsibility now can be given to the money managers by choosing these kind of funds, that is the beauty which mutual fund also has created over a period of time to remove the headache of investors in focusing asset associations on their own rather than choose a product which also serves equal amount of similar purpose.
Certainly, but the last time we connected with you, you were of the view that the uncertainty in the markets is towards the fag end. What is your current view now and also give us some sense that from where do you believe the big trigger for the market will trickle in because we are getting to hear a lot of news on the tariff, the deals that are through, and even now the bond markets are giving us some signals. Are you concerned about that?
A Balasubramanian:
So, the way, I think when the tariff was being announced, from US point of view, it was supposed to be the one of the best decisions one could have expected in the sense it supposed to bring in trillion dollar by way of tariff collection, supposed to bring in trillion dollar by way of reduction in the freebies that US government has been giving to the local institutions and research subsidies and so on and so forth.
So this now is getting diluted and now once again the shift is getting focused towards rest of us from an investing point of view. that is why the bond market actually reflects the fiscal correction which was supposed to happen, did not happen, would not happen as quickly as possible plus rating downgrade that happened recently on the basis of tariff uncertainty, inflation rising, slowdown in economy and so on and so forth. So, this uncertainty now getting back shifted to US market.
At the end of the day, one should also remember despite interest rate being high in the US market, companies are doing very well. See, the company earnings are getting now better. Therefore, there is a disconnect between the bond market and equity market. Even I am very surprised whenever the yields are high, ideally speaking the equity market should actually correct. But this time it is not happening because the seven or eight stocks which are actually driving the US markets, their earnings have been pretty good, they are actually getting growth not just from US alone, they are getting growth from the international market. I assume a company like
Microsoft
would get large pool of the revenue coming from rest of us. The world is becoming a consumer of US products. Therefore, there is a bit of disconnect.
Therefore, you come to a conclusion that interest rates have gone up, therefore, it is negative for equity, that is why this uncertainty will remain. But having said that, economies like India and the whole tariff thing, we seems to have managing it quite well and the impact on India is going to be relatively less and Indian economy is doing well. First time I am seeing in the last number of years, fiscal we are in a sweet spot. Indian fiscal is in sweet spot.
Tax collections have been very good. GST collections have been roaring. If the companies are not doing well, if the consumers are not buying anything, why would GST collections will go up? Therefore, there is an implicit impact that we should see on the momentum and the earnings are coming back as we move forward and India is the only country where interest rates have been cut.
So, the interest rate already have been cut by about 20 basis points. Today one-year and 10-year yields if you look at, it is about 6.2 for 10-year bond yields, so which essentially mean for companies for borrowing in the country is at very, very cheaper rates very-very high.
I did meet one of the very small
SME
companies, which has got less than 40 crore turnover. I just casually asked him what is your cost of borrowing and he said my cost of borrowing is 8.5%. A company which has about 50 crore turnover and 8.5% he is getting money from the bank, which essentially means his profit could be higher and which otherwise he used to have earlier by way of high interest rate regime, paying high interest rate for him running the business that has now come down, therefore his margin will be higher.
He will be able to create more employment. From 50 crore, he can actually aim to become 100 crores which is an aspirational change that has come at the mid-sized companies and also the cost of borrowing. The bigger plus point for India is actually the cost of capital in India has come down so much and companies will be able to deliver better numbers as you move forward.
So, if rates go down, that means somebody will take a haircut, either an NBFC will take a haircut or a bank will take a haircut or the unorganised lender will take a haircut. So, while interest rates going down, it is great news for corporate, it is great news for consumers. Who will take the haircut?
A Balasubramanian:
So, there is no haircut. It is about how much money you make. We are keeping in mind the band in which you must lend. So, after adjusting your cost, so you keep a NIM of say 3% to 5% or 6-7% which is which you lend.
So, therefore, ultimately these businesses are driven by the NIMs and other good thing on this sector is absolute profit that they make over a period of time, I think they will keep rising. So, balance sheet size increasing, your top line is increasing, therefore your bottom line is increasing.
So, necessarily the interest is coming down, only the period where interest rate could happens, you are not able to pass on the drop in interest rates, even on the deposit holders it takes some time, so there is a transition time of about three to six months you can say, on transmission of interest rate both on the lending side as well as on the deposit side, but otherwise this sector will remain one of the big sectors given the fact that they are proxy to the economy and they are the one creating businesses, therefore they will remain the sector to watch out for even going forward.