Lessons From FY18 Investors Should Remember In FY19
What’s the best way to beat market volatility? Ignore it, Kotak AMC’s Nilesh Shah said.
Invest in mutual funds based on your objective rather than by looking at the markets, according to Nilesh Shah, managing director at Kotak Mahindra AMC.
The twelve months starting April 2017 have been nothing short of a rollercoaster ride for investors in Indian equities. The year started on a high note with the implementation of a nationwide unified tax system and Moody’s first upgrade in over a decade. However, a global sell-off and the finance minister’s decision to bring back a tax on long-term equity gains led to a sharp correction in the last quarter.
“In 2017, any batsman could have scored run. In 2018, if you have the dedication and discipline like Virat Kohli, only then you will make runs. So, 2018 will be challenging, different and volatile and yet it will give lower returns,” Shah said on BloombergQuint’s The Mutual Fund Show.
So what’s the best way to beat market volatility? Ignore it, Shah said.
“People who forgot that they have invested in mutual funds made far more money than people who were trying to move from one mutual fund to another,” Shah said on BloombergQuint’s The Mutual Fund Show.
In Charts: How Markets Fared In FY18
Below is an edited transcript of the interview
People ask why no mutual fund house suggests their investors to book profits when valuations are high, they only suggest buying. Now most of the Mutual Funds’ net sset values are down 10 percent. Isn’t it a myopic way to look at mutual fund investment?
Every mutual fund has been talking about asset allocation from day one. One invests in mutual funds by looking at their objective, as opposed to looking at markets. If one over-invests in equities by market appreciation or investment, we always recommend booking profits. But the profits cannot be looked at by everyday markets. People shouldn’t think that the markets are looking down by two percent today, so I should have sold yesterday or if tomorrow markets are going down, I should sell today. No one can predict the future. Markets will keep going up and down. The journey of Sensex is such that when I started my career, it was at 1,000. Today, it is at 34,000. Perhaps by the time I retire, it will be at 1 lakh. So, I am playing for 1,000 to 1 lakh and not for 31,000-32,000. That’s not the game.
In mutual funds, the central message is to think for long term and invest if you have three-five year horizon in mind.
There was a study in the U.S. which tried to figure out which investors make maximum money in mutual funds. They were all dead investors. People who forgot that they have invested in mutual funds made far more money than people who were trying to move from one mutual fund to another. That kind of investment horizon is required. I have always suggested to be like Kumbhakarna. So you can invest today and go to sleep for 14 years and after 14 years, when you wake up, put 100 percent money in equities. You will make far more money that way. But the reality is that post Ramayana, we haven’t met Kumbhakarna. My hypothesis is that if Ravana had invested into mutual fund and would have disclosed it to Kumbhakarna, he could have woken up. We would have changed Kumbhakarna.
I recommend investing for long term, ignoring all the volatility. That will give you maximum money.
In 2018, we have seen the return of volatility. While the average investor will deal with it in his own sweet way, should mutual fund investors expect volatile times and don’t wait for the return of 2017?
Undoubtedly, neither will it provide the return of 2017 because that was exceptionally a good year, nor we will be able to provide lower volatility of 2017. 2017 was like the Indian cricket pitch. You could have played a match like T20 and scored runs and luck would have favored you. 2018 is like the South African cricket pitch. Even in T20, you will have to play like a test match. Save your wicket and score runs whenever there is an opportunity. In 2017, any batsman could have scored run. In 2018, if you have the dedication and discipline like Virat Kohli, only then you will make runs. So, 2018 will be challenging, different and volatile and yet it will give lower returns.
Do you think the increase of domestic flows or such investor behavior which started around August 2017 will last when times turn volatile?
The increase in domestic flows is likely to continue. Because of this, Rs 7,000 crore are by way of systematic investment funds and Rs 2,000 crore are by way of employee provident funds money coming in exchange-traded funds. So, roughly about Rs 9,000 crore every month is most likely to sustain. Depending upon volatility, some of the lumpsum money will go up and down but by and large will we be able to generate this flows in equity funds in financial year 2019 compared to the ongoing financial year? Then yes, there might be some 5-10 percent here and there, but by and large, yes. I am more worried about flows in balanced categories.
Why have the flows from balanced funds dropped since December 2017?
From April 2017 to Dec. 2017, a lot of money came in assuming that dividend is equivalent to return. Balanced funds were declaring regular dividend. In a rising market, your principal was intact, and you were getting one percent a month or thereabout. But in a falling market, people understood that dividend is different from return. The dividend is coming in falling market, but your principal is also getting eroded. Dividend is not equivalent to return, that truth will be understood by the investors in downturn and hence that flow which was coming in assuming that dividend is equivalent to return will start disappearing. My guess is that balanced flows will come down a little bit, even from February level which will be a healthy correction. We want mature informed money to come into market. We don’t want immature flows or flows which are coming with wrong expectations into the market. We are conveying that dividend is not equivalent to return.
Please don’t invest in balanced fund or any other equity fund looking at the dividend track record. Dividend can be paid out of your capital also.
There is also some bit of misselling happening to gullible investors?
Undoubtedly, there has been certain miscommunication from distribution end or from mutual fund end. When we communicate then it reaches out to one set of investors and not to masses. We will have to put more effort. We have to anticipate the behavior of an investor with a layman’s mind rather than an experts mind. When we say dividend is not equivalent to return, it is understood by some set of investors and not all. So, some experience, better communication, concrete effort by media and mutual fund as well as distribution community will ensure that the flows which are coming into mutual funds are coming with expectations of reality rather than expectation of perception.
What kind of investors should invest into balanced funds? What are the things that they should know before they put the money in balanced funds?
Ideally, someone who doesn’t want to do asset allocation and has a long term horizon should come into balanced fund as there is 70 percent equity and 30 percent debt. A person who doesn’t want to do Systematic Transfer Plan but is willing to put lump sum money and take the risk of it, he should come into balance fund and then at appropriate market valuation or correction, he can move from balanced fund into large cap equity.
We can create a cascade of risk. Let’s say he is conservative. So, he could start with monthly income plans which is 20 percent equity. Then he can come into equity savings schemes when markets correct which is 40 percent equity. Then he can come into balanced funds which is 70 percent equity. Then he can go to large cap which is 100 percent equity. If market fall doesn’t stop, you can go to midcap, small cap and sectoral. By then market fall will definitely stop. So, I can create a cascade for a conservative guy, an average guy and a risk guy from MIP to sectoral funds. That’s how they should utilise hybrid funds.
When market gives you half-volley, you should hit it for a six. When market gives you a yorker, you try to save your wicket. You don’t try to hit for a six. Even Tendulkar won’t be able to do it with every Yorker. Even Mahendra Singh Dhoni won’t be able to repeat his helicopter shot on every ball. They have also saved their wicket on a Yorker. They have used all their might to hit it for a six, when there was a half folly. If you stay on the wicket, you will get half follies.
In volatile times, what should an average investor do when if he is able to take moderate amount of risk?
Every investor should focus on asset allocation. It is always easy to say that in the long-term, equity will deliver outperformance. But in last 25 years, how many people have remained invested for this equity market bull run? Invariably, when markets correct like in Oct. 2008, May 2013, Dec. 2016, people move out. People stop their SIPs and hence it is important to do asset allocation. Put something in debt, equity, real estate, commodity, that combination will deliver return on your portfolio.
Don’t get lured by the past performance of an asset class and get invested. That’s not the way to make money. Expect the reality.
In 2017, markets delivered great return. It was a batting pitch. In 2018, it is more likely to be balling pitch. It is going to be more volatile. Moderate your return expectation because every ball can’t be hit for a six. There will be balls on which if you save your wicket, it will be a great achievement. Try to be a long-term investor. Everyone believes that so-called experts like us have the ability to predict markets. If you see our track record, you will realize we are all students of the market and not masters. There is no one who can predict the future. Who knows where the bottom or top is. So, if you remain long term invested then you will be able to ride the volatility of the market. That long term horizon is necessary because it is the nature of the market.
Then there is Systematic Investment Plan. Please don’t put lumpsum money into equity market unless you are Kumbhkarna. We all know we can’t be Kumbhkarna, so try to invest on a regular basis. It is combination of regular, systematic, long term investment and asset allocation that creates wealth for investors.
For a newcomer investor, should they continue with their equity mutual fund SIPs?
Undoubtedly, yes. You don’t evaluate SIPs on a 3 to 12-month basis. If you see our historical track record, there are times when SIPs have given negative returns within one to three years. If you stay invested over a period of time, then those SIPs start delivering great returns.
The biggest cardinal error, which an investor makes, is to stop SIPs in the bear market because that is the time when his negative return will be maximum. You don’t walk out in a bear market. You remain invested in bull and bear market and that’s how SIPs deliver returns.
So, for last the 12 months, SIP returns will be negative to marginally positive. It will disappoint lot of people, but this is not the time to stop your SIPs. You make SIPs for five-10 years or 15-20 years. Please don’t evaluate on a single year basis.
Is it good idea to stay invested in balanced funds SIPs too?
You must understand your objective. If there is a widow who needs monthly income on a regular basis as well as capital protection, then balanced fund is not appropriate for her because equities can be volatile, and the returns can come from her own capital. When her principal dips, she may take wrong a decision. So, we are not looking from a market point of view but from a psychology point of view. She needs safety of principal and regularity of returns. She will be better investigating from credit opportunity funds to income funds to monthly income plans to equity saving schemes. That’s the range for her. In that she will get regular income and reasonable protection of principal. There can be some volatility as debt funds can also go up and down but that will be lower compared to equity fund.
How is it different from fixed deposits where you also get regular returns?
In fixed deposits, your returns are fixed. But interest rates can go up and down. Imagine a person who had put in money in fixed deposits at 10 percent, 5 to 6 years back. Today if he is coming from roll over it could be 7 percent. Suddenly his income will drop by 30-35 percent. This is exactly what happened between 1997 and 2003. In 1997, those public financial institution bonds were 16 to 18 percent and when they came for maturity in 2003, they were at 6-7 percent. Imagine the plight of the deposit holder. His income will come down by 30-60 percent. Hence, you have to manage your health properly.
If you are conservative, don’t take too much risk. Don’t go to equity fund. Try to remain between debt funds and hybrid funds. If you are an average investor, you can come into hybrid funds like MIP to balanced funds. If you are risky investors, then you can take large cap to small cap. Every time it comes to down asset allocation. How much you will invest depends on your risk profile and objective.
Would this be a good time to look at small and multi-cap funds?
Debt fund is like playing cricket in a ‘V’. Equity is cutting the ball square or passing the ball through the slips through late cut. But if you are talking about small and midcap in equity, it is like hooking the ball. Many people can play straight but they cannot hook,they duck the bouncer. Many people can hit square cut and late cut, but they cannot hook. When a bouncer comes please duck. But if you can hook the ball, take the risk. If you are lucky, successful then you will get a six run. If not, you will get caught out or injured.
Please don’t look at a bouncer and then decide what you need to do. First look at yourselves that if you have the ability to face bouncer or not. Will I be able to take the volatility of small and mid-cap fund or not? You don’t invest looking at small and mid-cap deliver 55 percent return last year. Please think about yourself, will you be able to take 30 percent downside? If no, then small and mid-cap fund is not for you. If yes, then it is for you. Then think, can I go lump sum because I am Kumbhkarna or should I go SIP or STP because I am a normal human being. If your investment objective is for 6 months, then don’t invest in small and mid-cap funds. If it is for 6 years, then yes. So, check your risk profile,investment horizon and check how much downside you can accept.
Kumbhkarna is a metaphor. All we say is equity is long term. Take a long-term call and it takes away lots of things. To become a great investor, you have to answer only two questions. Ask yourself the company in which I am investing, will it be existent after 10 years or not. Second, with how much confidence can say that it will make more money after 10 years than it is making today. If you get this answer convincingly you should invest, otherwise avoid.
What products you choose in mutual fund industry? Will the equity markets will be supportive enough for mutual funds to do well?
2018 will be a volatile year. The markets will go up and down. The downside is protected because companies are giving good results, interest rates have come down, the election bound government is likely to spend more money and monsoon is expected to be good. The upside seems capped because of political uncertainty, rising oil prices and trade war related issues in global economy. So, we are more likely to see volatile swing moment in markets. This is opportunity for you to make money. If you can capture the bottoms, great and if not let your SIP run.