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    SIPs worst possible thing to sell to an investor, says Ajay Srivastava

    Synopsis

    The regulatory setup needs to change to incentivise distributors to advise customers and make investment event based. SIP should be used only if you really have nothing to do with life and you do not like your money very much!

    ETMarkets.com
    Today an advisor cannot sell mutual funds and a seller of mutual funds cannot advise. How does an ordinary mutual fund investor optimise investment and know when to get in and when to get out, says Ajay Srivastava, CEO, Dimensions Corporate Finance.

    What a November it has turned out to be for Dalal Street and for all of those that are investing in mutual funds. Is it sustainable? What is your view as far as December goes?
    It is absolutely sustainable as long as the liquidity flows do not dry up. With the new dispensation in the US, I do not think that is a worry and our index is that if Tesla can remain at 500 billion the world is doing very well at least on the liquidity side. You can argue about fundamentals being good or bad but what has changed for India is that Indian promoters for the first time are taking in capital by droves. They are welcoming capital, diluting stocks, selling shares. Indian corporates have never had such a big buffer of capital and they have raised good quality premiums. So, the big corporate sector in India is far stronger than it ever was.

    Second, liquidity means enough PE funds to do an M&A, stress buyouts, division buyouts etc. There is a huge market for assets in the country today. A lot of people want to buy out companies. They are getting money cheap from the endowment fund in the US. They want to deploy money in a country like India where there is huge scope to buy out assets. This year, they came out here for the longer term to buy out assets. At this point, they look expensive but from a five-year perspective, they do very well.

    It is liquidity, liquidity and liquidity -- that is what is gearing our market and we are much stronger as a corporate sector than we were at the start of the year. That is driving us and we must have faith in the market as long as liquidity is there, we do not need to worry too much.

    You are saying that on the liquidity front we are in safe hands. But what explains the outflows that we have seen on the mutual fund side as far as equity outflows are concerned?
    Mutual fund in India is a problem area and there are multiple reasons.You just cannot blame the fund managers for not giving alpha performance because they are not supposed to do that. At the end of the day, they are paid to get remittances into their system with SIPs which is equivalent to getting into the market again and again without realising why you are doing it.

    The fact is, the funds have performed miserably and most investors got stuck in the funds and have done horribly with their portfolios. The numbers will tell you that for a year you have not even covered the debt. Gilt funds have given double the returns compared to the blue chip funds in India. The problem is a two-fold one. It has to do with the way the mutual fund industry is set up and the second problem is a regulatory one. Today an advisor cannot sell mutual funds and a seller of mutual funds cannot advise. How does an ordinary mutual fund investor optimise investment and know when to get in and when to get out?

    It is a very peculiar set up and the compensation system today for a mutual fund distributor is supposed to be with the time period of investments and not when you get in and out etc. So there is no incentive for him to churn anything for any investor whatsoever. So, if you are stuck in a fund, the fund manager will say let him be there, what do I care? So, who is going to take care of the investor? He has lost tonnes of money in mutual funds schemes because the returns will not come in as you have been told to invest and sit. This is not a market to invest and sit. No market is for just investing and sitting. That’s not the way the market works.

    The whole setup is geared to underperform. The regulatory setup needs to change to incentivise distributors to advise customers and make investment event based. SIP is a horrible thing for an investor and the worst thing possible that you can ever sell to an investor.

    Going into next year, the multicap definition will change and the reallocation which is still to take place. Do you think this may be the start of a new bull run?
    I do not see a problem in terms of this market carrying forward. It may have its own little reversals. The December results may not be very good and in February, there may be a reversal in the market which typically happens every year in our cycles. That is perhaps why most people who were stung by remaining in the market after the index touched 13,000 last time, are choosing to book profits and that could be a very wise move.

    You could get lots of these stocks cheaper in February than they are today. If you get a good quality long-term stock specific portfolio, you can go forward. If you are a mutual fund investor you must be alert as to when to take the money out. Last time, the investors who stayed around at 13,000, never saw the returns and so might as well book some money in the banks.

    Everybody keeps suggesting that you should be parking your small savings in SIPs every single month. But during times like this, what do you do?
    SIP is saying I will take an umbrella out irrespective of whether it is raining or not. It does not matter what has happened to the world, I will keep putting money in. Common sense tells you that is not a sensible strategy because you need to respond to the economy, need to respond to markets and need to respond to a lot of things. SIP is an instrument which should be used only if you really have nothing to do with life and you do not like your money very much!

    But if you really are invested in a mutual fund, the key thing here is to look carefully as to how you want to build your portfolio. In India, if you do not have IT and pharma in your portfolio, you are not really building up a good portfolio. You need to go sectoral now.

    Most people in India do not have US investments. The Indian mutual funds which offer US portfolios are wonderful places but look at the corpus in one fund. It is Rs 800 crore only. The biggest is Franklin with Rs 2400 crore or thereabouts. In one fund, it is Rs 80 crore. Investors could have participated in Amazon, Facebook, Google sitting in India in rupees through these mutual funds but nobody told them because there is no incentive for anyone to tell these investors that the US market is booming, it is better than anywhere in the world and you can participate in it.

    So, the key is to incentivise intermediaries to do the information dissemination to the investors and to take them to proper places to invest. It is a good way to invest through mutual funds. You cannot buy a Google at an Amazon at $3,000 or Rs 2.5 lakh a share. But you can certainly participate in a mutual fund so it is a good vehicle but it needs sensible advising of investors with appropriate incentive structures for distributors so that they guide the people correctly.

    The second is ETFs. India is still not seeing ETF. In the US, ETFs will eat the mutual funds for breakfast, lunch and dinner. They are cheaper, they are flexible and the fund managers only work with alpha at the end of the day. At ARK mutual funds in the US they give returns of 160% because they are focussed funds like genomic funds, technology funds, future revolution funds. In India, the fund managers cannot take calls of a larger kind. That is one of the issues but the key is educating the customers. There is a good way to participate in various segments of the market at various points of time. It is not about putting money every month in the market.
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    21 Comments on this Story

    Ajay Singh52 days ago
    Mr Ajay, what do you mean by incentive to distributor or advisor etc? What the fund house doing with ~2% money of investor? The fund manager just enjoying their huge salary and no obligation to investor for good return. Just lip service on TV screen. Just link fund manager 100% salary based on fund performance and see the result.
    Deepesh Sao52 days ago
    Wow, finally one guy has the guts to accept what this SIP's underlying main motto is viz just to milk more money in the form of commission from MFs. Unfortunately I do not find a single MF which thinks more in line of Venture Capitalist and identify the businesses when they are really baby Parag Parikh is one to some extent but more I line with US exposure only. Investing in US Techs now may be perhaps very risky now. They, to my mind are at peak of their valuations.
    Kaushik Saha54 days ago
    Index fund or ETF far better than MFs as return of MFs was not appreciable. They are unable to beat benchmark since March 20.
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