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Go for balanced and multi-cap funds, avoid smallcap funds: Dhirendra Kumar, Value Research

Ultra short term bond fund for any period less than one year is good enough.

ET Now|
Updated: May 10, 2017, 07.30 PM IST
Go for balanced and multi-cap funds, avoid smallcap funds: Dhirendra Kumar
Go for balanced and multi-cap funds, avoid smallcap funds: Dhirendra Kumar
In an interview with ET Now, Dhirendra Kumar, CEO, Value Research, says those investing for less than a year should not get attracted to the best performing debt fund as that could be risky

Edited excerpts:

There is a big debate on active versus passive. What do you choose as a mutual fund investor?

Every year I revisit this debate. So far the index funds have not taken off in India. But there are symptoms which will make indexing or investing in index funds fairly mainstream in the recent future. Indexing has not taken off so far primarily because the market was not highly institutionalised. A good part of the market is now being managed by or being actively managed by fund managers. The basic institutionalisation is very much in place. The cost of active management has gone through the roof. In India, the scale of expense is something which will start impacting the performance of the fund.

Also Indian equity funds have been seasonal and small so far. For the first time, we are witnessing at least 10 funds which are close to being Rs 20,000 crore. It has grown rapidly and now they are finding it hard to beat the index consistently. But still when we look at five-year or ten-year returns, some of the big funds still have a very compelling performance track record. They have beaten the index by a wide margin. But I visualise that because of the expense, because of the size, because of growing institutionalisation, things might change quite dramatically in recent future.

You are making a case that for someone who is in mutual funds for the long haul and I am talking about 10 year, 15 year and 20 years, one is better off starting with SIP in a Nifty ETF or a Sensex ETF. Forget about what some of the brilliant fund managers can do, just bet on Nifty ETF, if you are planning to create some wealth for your son or your daughter?

I do not think that time is right yet. The case is not strong enough right now because if I had invested my money in any of the ten largest popular funds in the past five years or ten years, I would have had one-and-a-half times more money than Nifty. So the case is not very strong right now.

But things will change soon. Most of the Indian funds have been able to run a fairly opportunistic portfolio where they were not committed to investing in largecaps or midcaps or smallcaps. They were go anywhere funds and that is what we have witnessed. But now they have been forced to be in largecaps. So their ability to manoeuvre themselves has come down dramatically.

If you look at the best performing largecap funds over the last one year or three years, it is not the Nifty fund but rather the Nifty junior fund. If we look at the largest Indian equity fund which has come up from nowhere, it happens to be Nifty index fund because the EPFO has started investing in index funds. So the popularity of indexing is also a self fulfilling prophecy. As more and more investors invest, funds get larger, those stocks benefit and then a virtuous cycle is likely to get triggered. When you look at the amount of money coming from NPS and from EPFO which is necessarily getting indexed, that is actually the start of the cycle besides the cost advantage and institutionalisation.

Let us address the other large concern for Indian mutual fund industry and that is size. Some of the large mutual fund schemes are managing Rs 15000 crore to Rs 20000 crore. India is not America where you got an Apple or a Google or an Amazon which have market caps of $500-$600 billion. India’s most valuable company is Reliance Industries which has a market cap of not even $80 billion. So the challenge for Indian mutual fund industry is that they are getting money but where are the stock ideas to buy?

There are multiple things that work here which is disadvantages and this has to really evolve much differently. Of course the global comparisons with the Indian scale is you get a real perspective and you find that the total capitalisation of the Indian market is equal to or little more or less than the Apple’s capitalisation. Within this, we have to see what is the Indian dynamics. In India, there is still a promoter who is still at the helm and they are the largest shareholders. We have to really see from a standpoint of how much of float is available for shareholders to buy and what are the set of investors.

Indian individual investors have been fairly seasonal and have not been a force in the market. Then comes the large public sector as that has dominated our financial landscape. These are all serious impediments to greater efficiency but now things are gradually changing.

Indian investors generally are fixed income investors because the absolute scale of fixed income return was so high that they just thought that it is not worth their while to take a chance with such a volatile asset class. Now they are being forced to think about it. The last one-one and a half year, retirees who would actually not even consider investing in equity are being forced to think about how to optimise their returns. This ia a very big fundamental shift to long term investors getting drawn to the market. The whole SIP momentum that we see is also attracting investors in a fairly desirable way.

Indian investors have mostly been disappointed in the market because they came with a seasonal and opportunistic mindset. But things are changing quite dramatically. It is just a matter of time that indexing will make for a successful case but the large equity funds still look very promising.

When you say Indian equity fund of a fairly diverse kind, I am not referring to the small caps and midcaps which definitely look scary and more cyclical. But when I see the large funds investing in large stocks as well and doubling your money in three years that looks quite interesting and it still looks the kind of strategy that might be sustainable.

That is the point right because the markets themselves are at an inflection point. The small and the midcaps have had a great run. There have been some underperformers like IT as well as pharmaceuticals though I know you do not propagate sectoral funds at all but is it time to take cognisance where does the market go from all time highs? Should one look at hybrid funds or fixed income funds or multi-cap funds? Or should one take very specific concentrated bets on either the smallcaps or the largecaps? What is your recommendation for someone looking at both of one year timeframe as well as the five year timeframe?

For any period of one year and less, you have only fixed income funds and may be a fairly conservative fixed income fund because fixed income funds are under pressure to perform while things have changed dramatically.

You may not have the upside on account of a rate cut and so investors should be fairly conservative there and ultra short term bond fund at most for any period less than one year is good enough. One should not try and maximise return here, you will get negative surprises and it will be good to avoid the funds which look extraordinary, which are the best performing fund over the recent past because that return will be coming by assuming a risk which you may not be prepared for. That is the whole idea of investing in a fixed income fund. You are completely unprepared for any downside so leave some money on the table, do not get attracted to the best performing debt fund.

Then comes money for few years and I am very scared of even suggesting a smallcap fund, so scary that many of the fund managers themselves have stopped taking money. In fact the number of funds which have stopped taking money in the smallcap category is quite unusual and that number os growing. I have never expected that we will have Rs 5000-6000 crore management in some of the small cap funds which were always on the periphery. They were never mainstream. So I would say that is the avoidable part of the market and that is important.

For any investor getting into the market should never be attracted to the best performing asset class in recent times because that is just start of the disappointment so I would say balance fund and multi-cap funds are the only mainstay for the money which you are unlikely to need for couple of years. Rest of the things looks scary.

I can of course anyway just the relatively the promising ones in each of these categories but these are the only two funds which comes to my mind and of course I would say the multi-cap tax saving funds for your tax saving investment. Maybe it is good time to start if you can avail that Rs 1.5 lakh annual investment in 80c which most investor should do. Get started with your Rs 12500 SIP now in a tax saving fund for most investors that turns out to be a forced long-term investment because to begin with you, get in locked in for three years.

You have made the point that small caps are something that one needs to be weary of right now but should one look at multi cap funds or be just very safe at this juncture given that the markets are already at record highs and stick to largecap funds?

Dhirendra Kumar: I would say that most individual investors should have a plan and sticking to multi cap funds. In fact, largecap funds today looks as opportunistic as smallcaps looked three years back because largecaps have had their struggle and the way the large, big companies are coming in, look at the news today or look at what happened to Reliance Industries three months back, look at what has happened to State Bank in the last one year. I would say that they are actually making a comeback and compared to their 2008 lows, we have seen a reasonable churn.

In fact, that is another dimension to the index. Indexing is passive management but then there is an investment committee which actually goes about revamping or rejigging the portfolio and the constituents of the index are actively reviewed and dropped.

If you are investing in the index fund and the weight of the poor performer actually has gone down in value, less money gets invested in that company. In a certain way, there is an active rebalancing or the weighting and the positions being reviewed periodically. So it is not really downright passive. But yes I would say that first time investor should start with a fund or be in a multi cap fund. Largecap fund looks reasonably opportunistic and the multi cap investor if he has to invest to save tax, he should consider the tax saving funds.

The markets are riding high on this SIP culture and it is a fantastic culture. You invest every month, you knock out the market volatility, do not think about today, tomorrow, forget about watching a television channel and discussing Nifty levels. That is the way you and me have always said that investors should go but what is your understanding of the SIP culture?

No, I am not very confident of that right now. I think it is a good start. It has happened for the first time in the history of Indian mutual fund and it is driven by two, three variables; one is the interest rates have come down so investors have been forced to think about alternatives. The other is the B15 incentive whereby fund companies have been incentivised in a manner by raising expenses to reach out to larger investors which is a good thing. But I think these are still early days because ever since we saw this thing happening investors have only witnessed a steady rise in the market. Investor thinking is very malleable, you see a 10% decline and the mood changes, the behaviour changes, people start stopping their SIP.

Now technically it has become feasible to give a SIP mandate or a bank debit mandate for perpetuating. So that used to be one of the decision making points. People used to think of it like a reoccurring deposit that has matured and you have to take that money out, that behaviour because of this automating the process of perpetual investments going on. We still have to see that how do investors behave once we see a decline.

The last time the market went down, people started cancelling their SIP mandate. This time around if we see that only 20% investors do and 80% do not, then we can say with confidence that Indian investors will continue investing and that will have a sizable impact. The other thing we should really take note that these are not driven by any mandatory diktat, you know, when we talk of the developed markets we see lot of pension money by the very design of the financial system and the long term savings getting channelized into the equity market. That is not the case in India.

These are all discretionary savings, somebody is persuading, somebody has been incentivised to go and take the message to the individual. Some people are doing out of greed, some people are doing out of understanding and some people are just doing it because somebody has initiated them.

It could be a combination of that. And everybody is pleased so far because everybody is sitting on some gain. How do investors react to any nominal decline is the only time when we will get an evidence that whether it is sustainable or not.

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