Mutual Funds Can Meet Needs And Not Greed, Say Nilesh Shah And Manish Gunwani
Fill it, shut it, forget it - that’s best for mutual funds, says Nilesh Shah.
The most rewarding mutual fund investments have been made by people who have invested for the longer term and then forgotten about them, said Nilesh Shah, managing director at Kotak Mahindra Asset Management Company on BloombergQuint’s Diwali edition of The Mutual Fund Show. By his own admission, the adage Shah goes by is an old Hero Honda advertisement - fill it, shut it, forget it.
The focus, according to Manish Gunwani, chief investment officer at Reliance Mutual Fund, is not to seek the “hidden gems” but timing when to be be aggressive or defensive. “You have to act a bit contra if at all. But even if you don’t act contra, at least be disciplined about it and keep going at it for 10-15 years,” he added.
Here are edited excerpts from the interview.
What are the key learnings that held true for you in the mutual fund industry, and taught you about investing and markets?
Nilesh Shah: I can best describe this by way of one advertisement which I used to see as a kid. Most of us in our generation will remember the legendary advertisement of Hero Honda motorbike. “Fill it, shut it, forget it.” That’s the best analogy for mutual funds. You invest, sleep over it and then let it grow at its own pace. In the mutual fund industry, the most successful investors are those who have forgotten their investments.
Manish Gunwani: In our family as well, the shares you bought in initial public offerings at lower prices in the mid 90s, if you look at them today, 3 digits have become 6 digits – that’s the kinds of returns. Even if you look at top performing funds, you take a 10-20-year track record, 18-20 percent compounding. And if you hold them for 10-15 years, its incredible rate of returns post-tax rate. So, that’s true.
In your learnings, you say ‘stock selection is glamorous but weightage is important and timing is extremely difficult’. Please elaborate on this.
Manish Gunwani: At the end of the day, for most mutual funds, because our size is reasonably large, most of our assets are top 300-350 companies, which is not a very wide universe. If you are doing personal investing, then your personal universe is much larger. Since you are restricted to, say, the top 200 companies for 60-70 percent of your assets, it is unlikely that at this point of time where the market has matured quite a bit, you will find a totally hidden gem. Stock selection is curtailed by that size restriction. But my learning is how much weight you give to a stock doesn’t get too much press and publicity but I have seen fund managers succeed purely because they are very good at weighing the stock appropriately, and not finding undiscovered gems. As I said, it is a very restricted universe.
But when you have a high conviction bet and when you a see lot of things in favour, you have to go on the front foot and hit it for a six.
At times when all fund managers are very confused, it is okay to just say that in the next three months I am not creating alpha and just holding on and going close to the benchmark. It is all about how you time when you going to be aggressive and defensive. That creates a lot of success as a fund manager, if you do that right.
One thing that people shouldn’t forget is that once you have made an investment, don’t let it be the only investment in mutual funds. Be a regular investor. Because systematic investment plans can go a long way in creating long-term wealth.
Nilesh Shah: Mutual funds are a vehicle of investment. Most of us generate regular income. For some Indians, income - expense = savings, as is the American style. For others, it is income - savings = expenses. That’s where the maturity of Indians fit in. We are a nation of great savers. Our savings ratio is in the 30s. But when it comes to investments, we are a nation of lousy investors. We are so stupid and idiotic that we put more money in currency than shares in a demat account. Currency notes give zero percent returns. There is no magic formula where a Rs 2,000 note become Rs 4,000 note in your house. But still, people put more money in currency notes than in currency notes than shares which were giving 15-30 percent compounded returns. So, we are a nation of lousy investors and that’s where the mutual fund industry popularised the concept of systematic investment. The idea is that markets are markets, they will be up, they will be down.
If you keep on averaging yourself at regular intervals, over a period of time, the rising tide of India will lift all of us. That’s where we propagate regular investment.
What would be the top mutual fund-related advice that you can give to either budding investors or people who have already invested in mutual funds but want to increase allocation?
Nilesh Shah: There is no doubt that things have improved, but what I wanted to stress was the point of lousy investments was retail ownership of equity shares versus retail ownership of currency on November 8. This is the set of same retail investors who allocated 25 percent of their savings in the equity market during the 90s bull run and today are happy allocating 2-4 percent.
In our culture we are told, don’t run after money. Money is not everything in life. I want to say that money is not everything in life, it is not important but make sure that you have made enough money before you make such a statement. You need to be wealthy to say that being wealthy is not critical.
Secondly, we are all bothered about our physical health. We go to a doctor whenever there is trouble. But we are not bothered about financial health. We need to have a family financial adviser, one who can give us advice, manage our emotional balance between greed and fear. So it’s important to realise the value of money. It is important to have a family financial adviser.
Thirdly, making money looks a very simple thing – buy a good stock, stay for the longer term and you will make money or do SIP and you will make money. But when you have to execute it, it becomes difficult. So, don’t take these things at face value. Thinking is one part, but execution is 99 percent of the job.
Your top mutual fund advice is ‘stick to asset allocation from a long-term perspective’. Can you elaborate?
Manish Gunwani: When the market is rising, the Nifty has not done much, but a lot of midcap and flexicap funds have given good solid returns over 3-5 years and then we see a lot of money coming in. Unfortunately, the moment market weakness comes, the money goes out. What is critical is, you have to establish the fact that, at least historically, nothing has given as great a return as equity mutual funds. 18-20 percent, very liquid, very easy to transact post tax and phenomenal returns. Once you establish how much you want to be in equities, let’s say, for Rs 100 you want to be invested for Rs 40, then investors should not get swayed by extreme years. You have to act a bit contra if at all. But even if you don’t act contra, at least be disciplined about it and keep going at it for 10-15 years.
There are some great stocks...even if you bought in 2007 and held till today when you are still at the peak, where you still make 20-25 percent CAGR, you have to be consistent across years in terms of investing that amount of money which you have allocated to equities.
It’s easy to be swung by fear and greed but somehow, they need to be able to keep that disciplined approach. That’s more critical than worrying about the last decimal return of one fund versus another.
What’s the quantum of returns that an average investor should expect by investing in an average mutual fund?
Nilesh Shah: An average equity mutual fund will be able to give a return which can meet your need, but it will never be able to meet your greed.
The most important thing which an investor must realise is that fund return and investment returns are not equal. Globally it has been proven that in most markets investor returns are significantly lower than fund returns. People do rear view mirror driving in investing rather than front-view driving. For example, there is a fund which falls from Rs 10 to Rs 8. It is down 20 percent (NAV). Another fund goes from Rs 10 to Rs 2, then it’s 80 percent down. So, in year 1, fund A looks better because it’s 20 percent down versus fund B which is 80 percent down. In year 2, that Rs 8 becomes Rs 10, so it’s 25 percent return, and there is a dead cast bounce and the second fund goes from Rs 2 to Rs 4, then it’s 100 percent return. A lot of people will end up investing in fund B based on one-year performance because it is 4 times better than someone else. But a good adviser will actually recommend investing in fund A because that fund manager has moved through the turmoil to deliver safety of principal.
So, when you are investing in mutual funds, don’t bother about fund returns but bother about your return. Don’t look at past performance but look at future potential.
Build a portfolio which meets your investment objectives or longer-term investment horizon or the regular investment or asset allocation, the equilibrium between greed and fear will work. If making money was so easy then every viewer could have become a billionaire. Please realise that it’s not that easy and hence you need an adviser who can construct the right portfolio through the right tools to achieve your objective. Mutual fund can meet your needs but for greed try something else.
What’s an average expectation that one can have?
Manish Gunwani: An average mutual fund will be close to the benchmark. But the issue is, on an 8- 10-year basis what can the benchmark do. My guess is, it will be slightly less than last 10 years. Based on the fact that, both globally due to debt and demographics and in India because of policy, we are moving to a slightly lower inflation trajectory structurally. So a lot of growth, in nominal terms, was driven by inflation in last 10 years. If I could take the average GDP growth of 6 percent plus 4 percent inflation, then we do nominal 10-11 percent versus the 12-14 percent what we have been doing. Corporate profit on a conservative basis is the nominal GDP, although it could be a bit higher because a bigger part of economic activities are getting formalised. So the organised guys should outperform nominal GDP. But on a conservative basis, typically 12-13 percent corporate profits. On a 10-year basis, the starting point of valuations relatively doesn’t matter because the compounding of earning is so strong that whether 18 PE becomes 16 PE is not going to materially change the calculation. My guess is less than last 10 years, somewhere in the 10-13 percent range. Post tax, opportunity cost being lower in the next 10 years versus the last 10 years because last 10 years FD gave higher returns than the next 10 years, I do think that 10-13 is a great return.
Over a 10-year period, 10-13 percent return is a staggering number.
Nilesh Shah: My question is very simple. Do you think Sachin Tendulkar is the greatest batsmen in the world of cricket? 99 percent will say yes and 1 percent will not agree. That 1 percent will say Tendulkar was so gifted, talented and committed, if he had 30,000 balls he should have scored 1,80,000 runs. If with his talent he couldn’t hit six in every ball, he is not the greatest cricketer. The reality is that Sachin Tendulkar became Sachin Tendulkar by not hitting every ball for a six. In fact, out of 30,000 balls, he scored only 15,000 runs. Yet he is the world’s best cricketer. So in the stock market, you can’t hit every ball for a six. What is important is to stay on the pitch. Imagine if Tendulkar had to please that 1 percent lobby, trying to hit every ball for a six, he might not have become Tendulkar. So, it is time on the pitch which made Sachin Tendulkar, Sachin Tendulkar. For an average stock market investor, he must realise that he does not have the luck, talent, discipline, and commitment of Tendulkar and yet he wants to hit every ball for a six. Then what can we offer him other than prayers.
How should one invest a lump sum amount or a Diwali bonus or a year-end bonus?
Manish Gunwani: Just fix your long-term goals of how much wealth you want to try and create and what are your end goals, whether it is retirement or child education. They should not change it based on what has happened in the last one year or last three years. If some midcap funds have done phenomenally well, they should not invest 100 percent of the bonus in those funds. Keep goals in mind. If you decided 40 percent equity for 10 years then just remain at that 40 percent. If you decided 20 percent in large caps then stay in large caps. Somebody who hasn’t decided should seek a financial adviser. Even in our own community, we see people slogging late in the night but couldn’t do the basic stuff to create wealth. It’s a real tragedy.
Nilesh Shah:Your Diwali bonus is not the only thing to invest. You earn salaries and hence you get a bonus. So, you have to first decide what you are going to do with the salaries you are going to receive. Let the bonus be a part of this pool including salary which you are going to invest. Second, have a financial advisoer who can recommend a plan for you. Are you investing for your marriage which is likely to happen in next one year? Are you investing for retirement which could happen after 30 years or so? Please have a plan and then proceed. Don’t consider Diwali bonus as the only thing to invest. You are getting a bonus because you are also getting salaries. Remember, income - savings = expenses and not income -expenses = savings.
What has the equity market taught you about investing in the last one year?
Nilesh Shah: The last 12 months of equity markets have shown us the power of hope as well as liquidity. We have seen in the past, when liquidity came with greed what catastrophe it created in the market. Now we are probably seeing liquidity coming with hope and the kind of positive impact it can make on an economy. So I am trying to figure out from the last 12 months of experience, is this liquidity with greed or hope? On this Diwali day, I hope, pray and believe that this is liquidity with hope.
Manish Gunwani: It taught me to expect the unexpected because you can get the economy going in one direction and the market going in another direction. It has been very surprising. But it boils down to maintaining your long-term discipline rather than trying to time things. Markets always surprise you.
Will you be bullish on the market over the next 12 months?
Manish Gunwani: My view is the business cycle, both domestic and global, are at the bottom. So valuations are a bit of a concern. But over three years you will get decent returns.
Nilesh Shah: In my 25-year career, I have not seen one day where I was bearish. I always remained bullish. I want to end this with one event. This was somewhere in the second half of 2008, post the Lehman crises. Markets were at 8,000. There were five of us in such kind of event. There were five stock market participants - brokers, fund managers, proprietary investors - who were trying to be bullish on that day. We had seen the index dropping from 21,000 to 8,000 and there was one person who was gung-ho, saying 8,000 will become 6,000. By God’s grace, till today that person has not been right. That was the absolute bottom of the market. Now even that person who was resoundingly saying that 8,000 will become 6,000 wouldn’t say that. We believe India is changing. It’s a trend which does not mean there will be no volatility, there will be no correction. Markets are cyclical, by their very nature they will go up and down. But I believe in this country, our time has come and you need to be bullish and optimistic.
Watch the full interview here.