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The Mutual Fund Show: Tips To Let Your Portfolio Bare Its FAANGs

How do you gain exposure to international stocks through Indian mutual funds? What do you need to do? Read to find out...

<div class="paragraphs"><p>Monitors display FAANG stock information on the floor of the New York Stock Exchange. Photographer: Michael Nagle/Bloomberg</p></div><div class="paragraphs"><p><br></p></div><div class="paragraphs"><p><br></p></div>
Monitors display FAANG stock information on the floor of the New York Stock Exchange. Photographer: Michael Nagle/Bloomberg

The FAANG stocks in the U.S. representing the world’s top technological companies have been the cynosure of many Indian investors. And international mutual funds are among the many ways that one can gain exposure to them.

However, Radhika Gupta, managing director and chief executive officer of Edelweiss Asset Management Ltd., doesn’t advice people to get into such schemes right away. “So, investors should do their domestic equity first and then jump into another market,” she told in BloombergQuint’s weekly series The Mutual Fund Show.

Once done with that, international investing is an important part of one’s portfolio, she said. The exposure that one gains depends on the individual, but she suggests starting with 5% of their total portfolio and then hiking it to 15-20% gradually. And then comes the question of what markets to opt for.

Gupta said investors must start with developed markets and then look at emerging markets funds, outside of India, with a five-year horizon. “International investing gets very exciting once the returns look good and then people get suddenly disappointed because they come on the basis of past returns.”

She suggested arbitrage funds or equity savings schemes—comprising 30% equities and 70% fixed income—as options to those looking to take advantage of a rising interest rate cycle in the future. Taxation in both such schemes, she said, is lower compared to other categories.

Trideep Bhattacharya, co-chief investment officer of Edelweiss AMC, too, participated in the show.

Watch the full conversation here:

Edited transcript of the conversation:

Can I start off with the most obvious question that is probably on the minds of everybody? I saw three polls already around Diwali, a couple of people called me up asking me for responses to polls and one question that was common was should we have exposure or more exposure for large-caps versus mid-caps or small-caps? Now just wondering, is it possible to determine what should be the exposures to any of these funds over a 12-month period and if so, what is your response to that?

RADHIKA GUPTA: I can start and I think Trideep can chime in here and give a market perspective. But I think from a personal finance perspective, trying to time sectors and trying to time caps, whether it's large-cap or mid-cap over any period is difficult. It's difficult for fund managers over a 12-month period. So that's the short answer. I think there are multiple approaches to this. One is you have some sort of core satellite approach where I say I have some amount of large-cap and some amount of mid-cap. It could be 60-40 and I don't play around with it too much, I mean, 10 to 12%, or you let more products like flexi-cap, do that work for you but I certainly do think that cap-based timing is extremely difficult, especially over a 12-month period.

TRIDEEP BHATTACHARYA: I think that's well said and rather than giving an answer I put a framework in front of investors listening, because that's what will help them decide. Firstly, which Radhika said, it depends on the investor objective, what are they trying to do and I’ll put two or three more dimensions to it. Second is, over what timeframe. For instance, if an investor has surplus capital, which he is looking to compound over a period of three to five years, then certainly the more Alpha prone areas would be kind of probably mid-cap or small-cap but having said that the investors need to have the ability to kind of go through the volatility that once in a while these funds will actually bring along with. Depending on the fund manager, the flexi-cap funds actually give the biggest amount of flexibility for the fund manager to navigate around the cap as we kind of call it that way. So, if you believe in the fund manager, then certainly the flexi-cap fund is the way to go about it. If you're risk averse, then certainly the large-cap fund is the one to start with. So, on net balance, I think it depends on the investor objective, the time horizon, the alpha expectation that the client has or the investor has over a period of time—all of these should actually go in deciding which way to go about it. On net balance, I would say go with the fund manager you believe in, the one which has a track record rather than going by the cap-basis.

In the wake of what is perceived to be the next 12 months, where in we might see rising rates, is it prudent for somebody to seek a mutual fund alternative to fixed deposits? Why or why not? Is there another alternative? Let's assume that the time horizon is 12 months or maybe 24 months? That's it, not longer.

RADHIKA GUPTA: I think there are multiple aspects to fixed deposits in the sort of conundrum we have around fixed deposits. One is of course, it is not a tax efficient solution. So, your mutual fund solutions are tax efficient. Second is the rate of return which is agitating more investors because of the way yields have fallen. So, there's a return question and there's a tax question. Now let's keep the returns aside. I think if you are a full tax investor, then certainly looking at debt mutual funds makes a lot of sense and over a three-year period, it definitely makes a lot of sense. In a less than three-year period, if you specifically asked that and I can talk about three years in more detail but in a less than three-year period, I don't think we should try and over optimise. I think liquid works for a short period, I would suggest arbitrage funds work very well, especially for this one-to-two-year period, because where fixed deposits have a marginal rate of taxation, these funds over one year have a 10% rate of taxation. When I have money, like I have money that I want to spend on a house construction that I might use in six months or 12 months, especially one and a half years and this is a big pool of money, I tend to park it in things like arbitrage funds, that works really well. I also think we should not stress with over optimising one year money. The delta between three and four and five, because I feel when interest rates are really low, we try to stretch the boundaries of credit and duration and what we are comfortable with and get into trouble. The second thing I would recommend, which is if you are a fixed deposit investor who wants to take a tad bit more risk and not equity risk or balance advantage fund risk and you're trying to look for a to-go solution, then you can look at a category called "Equity Savings". That's 30% equity, 70% fixed income with equity taxation, perhaps you can move that into equity later or perhaps you can keep it there. It's a start away. So, arbitrage for the very conservative equity savings for the guy who is looking at 18 to 24 months of a time period.

And the possibly rising interest rates will not have a large dampening effect on both of these options?

RADHIKA GUPTA: So, arbitrage definitely not, actually neither will because in arbitrage you are holding cash futures arbitrage and three months fixed income. So this is one category that is not duration credit sensitive. Equity savings is 1/3 equity, 1/3 short-term debt and 1/3 arbitrage. So, again, they're reasonably insulated.

Trideep, I guess this one is coming your way because, again, when I look at polls, and I hear a lot of experts who come on some of the shows that I do, everybody is believing that from a short-term perspective, BFSI banking is probably that space, which will do very well. From five-year perspective, Indian technology is probably going to get the best bang for the buck. My question was more about whether thematic funds are the ideal bet or not, but I would urge you to probably tell me that within thematic funds from a one-year perspective, our BFSI funds great to have, and from a five-year perspective, are technology funds great to have?

TRIDEEP BHATTACHARYA: The answer to this is a classic English answer, which is, it depends. But let me elaborate on what I am trying say in this. On the topic of sectoral funds, I think the first thing that one needs to calibrate is the risk appetite. If you go, let's say six months ago, even nine months ago, the consumer discretionary funds, were the ones in favour. Now obviously, with the two companies reporting and the credit growth improving, obviously the banking sectors is in vogue, if I may use that term. Hence, people are looking to kind of take exposure to that. Of course, technology, particularly given the new age IPOs that are coming, that's where it is coming from. So, if you put that in perspective, ideally, what I'm trying to highlight is different times, different sectors come into vogue. Then the investors who are looking to put money into sectoral funds certainly needs to have the patience and the wherewithal and the time to switch out at the right minute, in case he wants to kind of move on to the next sector in vogue over a period of time, so certainly should one invest in banking sector in the short term?

I can't make a recommendation on your television, but it will seem from the factual data, from the companies that have reported so far that the credit growth is picking up and we're in the early stages of the economic cycle. So, if that were to come through then the banking sector is certainly one that you should make hay in the sun, but hey, there are other ways to do the same. Like for instance, the capital goods companies, or like for instance early cycle in the consumer discretionary as well. So, in other words, while sectoral funds are one way to kind of slice the overall pie, there are many other ways to play this. But one thing that I would say, certainly given where we are in the economic cycle, that a fund with an economic bent towards it, in other words, which is oriented towards economically sensitive sectors is certainly the one to go about, whether it's banking sector or others, that I leave the choice with regards to the investor.

Tech funds are a hot topic of debate, I think, with the older new investors, with the new stage of IPOs, which have come about, it has questioned our investment framework to the core. Some of them like Paytm, etc., which are kind of hitting the market without taking a view one way or another, is certainly putting the question to all of us that are these businesses to bear or to be there for the long term or are these just fads? I would say some of them certainly will be around. The marketplace of contention is certainly changing from brick and mortar to more digital and the last two years has certainly gone in that direction. So clearly, over a period of time, the right selection of tech investments is one certain way to invest over the over the medium term but having said that, again, this is an area which is fraught with disasters. For one Amazon, which has been successful, there have been multiple Yahoos and other names, which have kind of bitten the dust. So, which one and who is running it? How is it governed? What are the investment frameworks that everyone is using, is certainly the key question to answer before we put money to work. But in principle, why not over the five-year horizon some of these tech companies will certainly be interesting opportunities.

Radhika, you've been vocal about the need for having international exposure and therefore my question to you is, if somebody wants to go ahead, have exposure to not just tech companies but international companies, what's the ideal mix, if you will? And maybe what's the ideal mix at the start versus let's say, as it builds up? Does it reach a particular level where it's ideal to have that kind of a mix?

RADHIKA GUPTA: I’ll share my thoughts here, actually the whole house and everyone will tell you that international investing is important. Now, let's just talk about the stages. As an Indian investor, clearly, international investing is not the first thing you do. So, you do your domestic equity first because I have people who come to me, I have 22-year old kids who come to me and say, I want to invest in a tech fund in the U.S. as my first investment and I tell them hold on, why don't you start with India, understand equity first, and then jump into another market. That said, if you're done with this, I think international is an important part of your portfolio. What percentage again, depends, but you can start at 5 and then go to 15 to 20%, it should be 1-2% but it has to be meaningful.

In my view, you should start with developed markets exposure first and you can do developed markets a couple of ways. So, there are U.S. funds out there and if you want to pick certain themes in the developed markets, for instance, then you can say that I don't want exposure to U.S. financials, etc., because I already have that in India, but some of the disruptive tech, I don't get that in the Indian context, I get largely IT services. I can do funds that are focused on U.S. tech or any of those indices. So, lots of those options are out there. I think once you are done with that, the second category to look at is an emerging markets fund outside of India, of course, the most major emerging market is China. Now you can access this either via an emerging markets fund or a dedicated China fund because that's really the biggest market. But with the thesis being that India is not the only emerging market that grows there's Bangladesh, there's Vietnam, there is China etc., then you can split the allocation. So today for instance, in my portfolio, I have a U.S. fund and I have an emerging fund as my international exposure and that's how I think I will build up and I would caution people if they're doing this please have a five-year horizon. International investing gets very exciting once the returns look good and then people get suddenly disappointed because they come in basis of past returns. Its equity, you've got to look at it for five years.

Your thoughts, both of you, on the fund of funds option because I think your website says you call it the investment food court. Can both of you talk about this?

RADHIKA GUPTA: I think if you're looking at fund of funds that invest overseas, they are a great way. I mean, there are two ways to invest overseas, either the asset manager in India directly manufacturers overseas and picks stocks overseas, he could do it actively or he could do it passively. The fund of funds option is basically us partnering with someone like a JPMorgan to do this overseas.

I think it's a very good option because as Indian asset management companies, while we can focus on a certain set of global companies, a market like China for instance, we benefit from the dedicated asset management expertise of a guy like JPMorgan, which has a team present locally in China. So, I think fund the funds work really well because they give you access to an international fund manager sitting in India. I must also correct because people sometimes think that fund of funds have a double layer of costs. Under today's SEBI regulations, the total cost of an FoF is 2.25% at max which is the same as a domestic equity fund, global fees, India fees everything put together. So, it is not more expensive, and I just thought I'd add that.

TRIDEEP BHATTACHARYA: I would actually overall say and echo what Warren Buffett said, that one has to kind of remain within the circle of competence and in that context, if you have a bouquet of options to invest wherein individual circle of competencies, whether it's basically emerging markets or developed markets or a particular market like China, Thailand, etc., is coming about then certainly from a diversification or from a risk return perspective, an investor is better placed to kind of invest in such an option as he gets the best of both worlds. Otherwise, trying to have a drag it back like Sehwag or the other way around and get into a disaster. So, certainly a fund of funds works particularly when we are dealing with diverse asset classes like either multiple asset classes like equity, debt, currency or for that matter international investments.

Can you tell me Radhika, what this was about? I mean, do people say that the expense ratios go up much more than 2.5%?

RADHIKA GUPTA: The funny thing is, I get two queries. If I got a coin for every time I got queries on international fund expenses, I would be a very rich person by now. Because there are two layers of costs in an international fund. So, let's take the JPMorgan example. There's a fee that JPMorgan charges, and there's a fee that Edelweiss charges. Now people sometimes on some websites like our AMC website discloses both fees. Sometimes channel partners disclose one fee, so people have no idea what it is and they sometimes assume that actually the 2% fee that JP is charging, the 1% fee that we are charging so the total fee is 3%, etc. So, there is a big myth going around that international funds through the fund of fund route have a double layer of fees. A few years ago, SEBI had capped the total fees as the same as in a domestic equity fund. So, between me and JPMorgan, however I split it, is my problem. I can't charge the consumer more, in fact because of this, this is an interesting stat. My U.S. tech fund is much more expensive for an American retail investor than it is for an Indian retail investor because of SEBI’s caps because we don't have entry loads, we have a 2.25 cap fee and those markets don't.

Radhika, there have been a bunch of NFOs that have come of late, right? The only difference is that in all of the shows that I've done, which required the advisor who comes in after the CEO, or the CRO has gone away talking about the NFO, says that while you want to invest in the NFO because there are established funds out there. So let the fund develop a track record, then you go out and invest in the NFO. Not a single advisor thus far has told me, no go out and put money in the NFO. I can understand if there is an NFO with a difference. Maybe I think you guys maybe came onto the IPO product or somebody else came up with a very different product, which is difficult in these days and times because of SEBI’s regulations, but otherwise, why should anybody go for an NFO?

RADHIKA GUPTA: Firstly, I have no problem with NFOs, you have to separate two things. I'm going to give you a restaurant analogy. If I were the owner of multiple food businesses and I have an Indian and a Chinese restaurant and, in my suite, I don't have a Mexican restaurant. So, as an asset management company or as a food or not, I'm more than entitled to open a Mexican restaurant. It's my business, right? I'm entitled to do that and hopefully I'll run a good Mexican restaurant. Now, you who is a consumer, just because every restaurant chain is launching a new restaurant and cuisine does not have to go eat at all of those. You will eat the things that suit your diet to the quantity you want. If there are 100 restaurants debuting in Bombay, you will not eat at a 100 of them, you'll go to a restaurant if it offers something new and I think that's the same thing.

AMCs will launch NFOs because they are going to open their basket. If I don't have a mid-cap fund in my basket, I probably want to launch one because I think I can do well in that category. So, there's nothing wrong with an AMC launching an NFO as long as they're qualified. A consumer has to be extremely discerning and in how they think about investing in an NFO. There are NFOs that I think are very unique. You mentioned the IPO fund, I think Bharat Bond and the debt passive NFOs were very new to the market. We also had a large and mid-cap fund index fund, which was the first time that it came to the market and there are first time products that come to the market which are genuinely new and you can consider them. There’s a 50th mid-cap fund launching when there are 45, then you may want to give it time. So, I think my point is that an AMC will do what an AMC has to do as a business, you have to do what you have to do as a consumer. Ask yourself, am I getting something new here? Is it fitting in my diet in some way and I would also say something, a I'm calling a spade a spade. No investment opportunity is time bound in our markets, right?

There's no two-week investment opportunity. If it's a good investment opportunity, it's going to last some time. So, the worst thing that you can do, in my view, is take an investment decision in a rush and I think the market will proliferate with more products. There are going to be lots of new asset management companies coming out, there are going to be lots of products. I probably have three NFO's in the next two months and I'll come on your channel and talk about them and hopefully they're all new. I think they all are, but I'll also have lots of new NFO's coming into the market but you as a consumer have to be a lot more discerning.

Trideep, does she dig out the yorkers in your group meetings also with so much aplomb?

TRIDEEP BHATTACHARYA: Since I've joined recently, not many so far and so far, I've been able to handle them. But I'm careful particularly after this answer.

The question was only that in case of NFOs which aren't necessarily unique and I'm glad Radhika said that because there are two-three implications of this. I don't know in which vein Radhika said it but if she is meaning that there is no need to rush the person doesn't need to subscribe while the NFO period is on, or do it after the NFO was launched and it's up and running?

RADHIKA GUPTA: Good decisions can never be made in a rush so if you understand it during the NFO, please do it by all means, I have nothing against NFOs but no investment decision—listed equity, debt—nothing in life should be done in a rush. The last thing I'll say on this, I have been in Delhi for some time looking at family and friends’ portfolios, I see portfolios with 150 schemes. That's not good for anybody.