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Time to stop chasing the highest yielding bond fund: Dhirendra Kumar

First-time investor coming into the market they are extremely reluctant to take on losses. So, the moment they are able to break-even, they get out. That is a psychological thing. It looks like an extraordinary thing to have happened but it is normal behaviour. After a prolonged struggle, once the investors break even, they pull out and that happened here.

ET Now|
Updated: Dec 11, 2019, 12.44 PM IST
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The fund industry has done a great service in making available bond funds or making the bond market accessible, which is otherwise not accessible to investors. But at the same time they are guilty of confusing investors with 16 kinds of funds, says Dhirendra Kumar, CEO, Value Research. Excerpts from an interview with ETNOW.

The SIP flows have been fairly robust while the overall equity flows have been very disappointing. What do you make of this divergent trend?
It is a very usual thing. If you look at the three-year return of all mainstream equity fund categories, the return is ranging between 5% and 8%. Towards September end, after the announcement of corporate tax cut, stock prices did go up and this was driving the stock price surge and that sustained in October as well. So, markets went up sharply in a brief period of time after a long wait of nearly three years. Investors who invested three years ago were getting into a negative return zone and that suddenly became positive by 5%, 7%, 8% and that is the general tendency.

First-time investor coming into the market they are extremely reluctant to take on losses. So, the moment they are able to break-even, they get out. That is a psychological thing. It looks like an extraordinary thing to have happened but it is a normal behaviour. Every time, the market goes up sharply for a brief period of time after a prolonged struggle, once the investors break even, they pull out and that is what happened.

But you have added about five lakh SIP accounts in the month, the highest so far this year. It is a testament to the continued value that retail investors have in this kind of a systematic approach to the markets despite developments on the macro front. All these concerns were not even seeing earnings growth pick up materially.
It is quite comforting that by way of SIPs we have a steady flow of Rs 8,500 crore into mutual funds. Two-three years ago, this was the scale of money which FIIs used to put in and they used to support the market. Our markets were extremely vulnerable to their actions and pullouts. We have been able to reasonably insulate ourselves from that because of the steady flow. But I do not think we should consider anything to be guaranteed. Investors can be very malleable and even among the SIP investors, we have seen big outflows this month. It is not that the lump sum investment was pulled out at once; first time investors generally tend to think that doing SIP for two-three years should be okay and it was not okay. They got negative returns. It is these first-time investors who would have pulled out.

In that sense, if earnings do not kick in, if growth is not back, if companies do not make more money where the government has contributed in a nominal way or in a reasonable way, then more may pull out. We have to see if it is sustained for good companies. The market has become very narrow and we are witnessing the there is a premium on some 50, 70, 80 companies. A bubble could build up if people go for quality at any price, unless the markets get broad-based. That can be supported only when a lot of companies start demonstrating that earnings are rising. If that does not happen in the next six months to one year timeframe, we will not see a broad basing of the market.

What is your advice to investors? What should they do at a time when we are seeing the markets close to record highs?
As usual, keep calm and carry on. If you have a plan and if you are investing your long-term money into equities, invest that through mutual funds and carry on. Your tax saving fund -- Rs 1.5 lakh contribution -- or whatever you can avail, you must invest to the hilt. If you are investing in a multicap fund or a smallcap fund in a nominal way, keep doing it. Keep it simple, do not get distracted by the noise.

If you are investing with a 3-5-year timeframe, I do not think there is anything to worry. Real problem is that we want our investments to be doing very well over a long period of time and at the same time, doing well continually may not be in the best of your interests. Ideally, the market should do extraordinarily well only when you need the money but that is very hard to predict, Just stay the course, stick to your plan if you have a plan. If you do not have a plan, get started.
If you have never invested in a mutual fund, start with a balanced fund and do not even look for advice. Get started and stick to it for two, three years; be regular and try and increase your investment as your income rises.

-Dhirendra Kumar



Which funds would you advise investors to look at? What category of funds?
If you have never invested in a mutual fund, start with a balanced fund and do not even look for advice. Get started and stick to it for two, three years; be regular and try and increase your investment as your income rises -- whatever it be, 5%, 7%.

Next, if you have to save taxes, get started with your tax saving fund. There is not much time now -- there is not enough time to spread it over the next three months -- January, February, March. Avail that, tax saved is money earned, so do that.

If you have a little experience and you are comfortable with allocating whatever money which you are unlikely to need for the next five years and more, start investing in equity funds. Just choose one or two multicap funds, large and midcap fund or from the value fund, these are the diversified vehicles for you to participate in the equity market. Choose one or two funds, stick to this plan and keep it simple. Do not spread your portfolio beyond two, three, four funds. That should be good enough.

We did see balanced funds seeing huge outflows this time around. What is the view on arbitrage funds and debt funds given all of the news flow?
It is quite worrisome. In last one month, we have seen all kinds of side pocketing, the creation of the segregated portfolio where funds have faced 2%-3% hit but this is also a place where a lot of regulatory moves by SEBI have pre-empted many calamities which could have been there.

The classification system drove the creation of the overnight category, segregating it from the liquid category and implementation of the load on the liquid funds which is driving some kind of sanity in terms of right kind of money flowing into the appropriate fund.

In that sense, despite making mutual funds safer or better organised or transparent, more methodical or aligning it with investors’ goals, for the first time, we have witnessed the credit issues hitting funds very hard. In a country like India where banks have faced NPAs on an unprecedented scale over the last 10 years, we are losing the sense of proportion.

Mutual funds have witnessed credit issues to the tune of Rs 1,500 crore. In a country where the banking system has faced a write off of R 2 lakh crore, it is nothing. But at the same time, for the investor who is investing his Rs 5 lakh or Rs 10 lakh, for generating income he has no choice but to invest here because fixed income investing is in big trouble because interest rates are going down. If you earn 6% on FDs and if you are able to get 7.5% without assuming huge risk in a mutual fund, it looks only 1.5% more but it is actually 25% more income for the old person.

That apart, there is superior liquidity and tax saving because you can index your income from the return generated from these investments. The lesson that comes from all that we have experienced so far is that investors have to be really careful, they do not have to necessarily chase the highest yielding bond fund. They have to be a little careful as there are no free lunches. One has to pay for everything and it comes with a risk. So you have to be a little less greedy, optimise returns and be little careful in terms of where you have to park your money.

The fund industry has done a great service in making available bond funds or making the bond market accessible, which is otherwise not accessible to investors. But at the same time they are guilty of confusing investors with 16 kinds of funds. Investors will do well with just three or four kinds, that will simplify things and if fund companies continue to supply all this, just choose four kinds of fixed income funds.

Also Read

Investors better off ignoring what’s happening in market: Dhirendra Kumar

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Err on the side of caution when investing in fixed income funds: Dhirendra Kumar

AMFI m-cap rejig not to drive meaningful churn in fund portfolios: Dhirendra Kumar

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