Roller-coaster ride that you get by investing in smallcaps may not be worth it: Dhirendra Kumar, Value Research
- For anybody investing for five years and more, equity hybrid funds are good alternatives.
- Regular SIP should help you beat the market over a period of time.
- The basic goal of any investment should be to beat inflation and then optimise returns.
At a time when sentiment is at a low ebb and there is acute volatility in stock markets, all weather funds really seems to be the right approach. Can you elaborate a little bit more on this?
All weather funds should always be the right approach irrespective of good time or bad time for the simple reason that for mutual fund investors, investment is the peripheral part of their vocation. People are busy working, making a living and the saving should be put to work. The basic goal of any investment should be to beat inflation and then optimise returns as much as possible.
So with that in mind, if you look at it as a very complex exercise, then you will not achieve your goal and your goal post will be changing. You will always be anxious because the market is always in a different state. Either you are excited about it or you are scared of the market. You will never get an opportunity. You will end up mistiming it. Simplifying your approach always helps and you have far greater control on what you are doing. So for uncluttering your investment, you should have all-weather funds.
Would you say that all-weather funds stand a chance of a muted performance as opposed to mid or small cap funds?
Over a period of five year and more, you end up earning similar returns without the anxiety. But in the short run, if you have a situation like say somebody was investing in 2017, one might look like fairly deprived if one was not investing in small caps and midcaps. But subsequently, the reversion to mean, the cyclicality of market actually catches up.
So long-term investors should try and keep things in a manner that requires least intervention. It should be a low maintenance investment activity and over a 10-15-20 year period of accumulation, the difference in having a very aggressive portfolio at different times, concentration can translate into superior returns over a period of time.
Likewise, concentration in a certain sector or capitalisation can enhance return but the reverse is just as true. When you get 70-80% return in smallcaps, and then you will see the free fall. On a three-year basis, it turns out to be the same but that rollercoaster ride that you have there might not be worthwhile and that is something which investors should appreciate. That appreciation normally happens after somebody had invested for a full market cycle a phase of rise as well as fall.
Given that you said that these all weather funds should be considered at all times for all kinds of investors as they perform well in unfavourable market conditions, what are your top picks there in terms of value-oriented growth as well as equity-oriented hybrid?
The equity oriented hybrid funds invest nearly three-fourths of your money in equities and so they are equity funds; 25% of the money is invested in fixed income and I am a great believer of something which is static. So it turns out to be- an equity fund with a shock absorber. And investors are driven out of the market in a declining phase simply because they were just not ready. A large number of investors get attracted to equity linked investments in a good market and when they see the first decline, they are not prepared for it. Despite knowing mutual funds are subject to market risk and equity is very volatile, when you actually see it happening with your own money, you are driven out of it. So these funds turn out to be a superior or a steadier take on growth.
And so equity hybrid should be the starting point. It is an all weather simply because most equity allocation 70-75% is generally multicap and 25% fixed income provides all the stability. I find them to be a reasonably good all weather alternative valid for most investors, anybody investing for five years and more.
Then comes a little more conservative all equity option. Ever since the funds have slotted themselves into different categories and committed themselves to conduct in a certain manner, I am beginning to think value funds, which actually show far greater resilience in a declining market and many of them have been able to build a very solid case for themselves.
They have a long history, in fact all the funds that are part of my selection they have been through at least two market cycles and they have shown more than doing far well in a rising market, they show far greater resilience in a turbulent market. So value-oriented multicaps they turn out to be the second alternative.
Third is a plain vanilla multicap fund, where all your money is invested in a manner and it is spread over largecap, midcap and smallcaps as well and dominantly growth. These are the alternatives. If you are able to build a portfolio of one or two funds from any of these categories, you will be able to beat inflation.
I am sure the regularity of investment, the SIP, the accumulation phase -- if you are doing it regularly -- should help you beat the market over a period of time simply because that will be the reward for your own discipline.
In the dynamic asset allocation funds, you can invest in a mix of debt and equity. At a time like this, would that be a prudent strategy?
I would say that the new classification actually provides for a balanced fund which is 50% equity 50% debt and that should have been a superior alternative; But in the balanced advantage or the dynamic equity allocation, not too many funds have been able to build a great track record. I like funds for what they deliver by design; diversification, active management but active management by building a portfolio of good companies is one part of the story. The other part is taking a call on the market and allocating the assets into equity or debt.
I have not come across too many fund managers calling it right and they have not been able to build a great case for themselves over a long period of time.
What are the advantages of looking at balanced advantage funds?
Balance advantage funds got created entirely because of tax breaks which was available. These funds were actually balanced funds, 50% equity, 50% debt and they were able to pretend that they were equity-oriented funds because the tax laws defined that a fund will be treated as equity if it has a 65% allocation to equity. These funds provided for 15 to 20% equity arbitrage which by its character it almost fixed income and optically it looks like that. From the taxation point of view, it looks like an equity fund.
It was actually a tax enablement definition which the funds were trying to leverage. Even since the long term capital gains on equity have been done away with, now we are subject to 10% capital gains tax. I really wonder if the tax case for that is as strong. Investors for the long run should be focussed more on choosing good funds and having the appropriate allocations, so that they can stick around for a long period of time and keep it simple and stick to their disciplined approach for investments, not getting too much carried by the things of the market which is either an exuberance or scary. That itself is the single biggest advantage for individual investors.