Invest into equities as an asset class for a minimum three-year horizon, says Sunil Subramaniam, chief executive officer of Sundaram Mutual Fund. Anything less than that is a risky proposition, he said on BloombergQuint’s weekly series, The Mutual Fund Show.
Here are edited excerpts from the interview.
What should the approach of an average investor be in a scenario like this, as investors are beginning to realise that volatility is the name of the game?
When they say Know Your Customer, I would say ‘Know Yourself’ and the risk tolerance of an investor. It is genetic, it is a function of his past experiences of stock market and various gambles that he has taken. That should be the predominant thing.
If somebody stays for 10 years, the chances of a 13 percent return which is double the interest of fixed deposit and gold. You have to see the proportion of time when you lose the money in the market. For one-year in Nifty, 30 percent of the time it has shown negative return. You stay five years, it moves to 10 percent and stay for 10 years then it is zero percent at any period. So, that’s the volatility of the stock market. I don’t recommend even equity funds for six months or one year, forget mutual funds. A fund manager can outperform the index by 2-3 percent points. If you have negative return, then you can minimise the negative.
Once you are coming into equities as an asset class which gives you expertise and diversification, you should have a minimum three-year outlook. Anything less than three years is high risk and if you are tolerant then you can go and invest in direct equities.
If I am starting off with a five-year horizon, would you recommend a mix of equity funds, hybrid, debt and gold funds or you will say as you have long horizon you don’t need to fine tune your portfolio this way?
At any point, there will be diversification across these asset classes. I will not recommend to any investor, even if they have 20-year horizon, to put everything in one bucket. An investor’s thought process at the time he invests and through the process he stays invested are very different.
When you are investing, you are investing for a future good. All investment is postponement of consumption. You are planning for future expenditure which could be your daughter’s marriage, son’s education or your own retirement.
You have a certain goal and you prepare a financial plan with creating money for that goal. But you have to prepare for that goal thinking, can that happen earlier? Life is full of uncertainty. Though a particular asset class gives you very good long-term returns, you should always have an alternative option when you suddenly need money.
If the market is at a low, then the whole purpose of investing is wasted. Whereas these asset classes like debt mutual funds, fixed deposits, gold have the ability that they downside protection, is better than equity in highly volatile times. So, the proposition can vary but never go 100:0. Never go 100 percent in equity or fixed income because both ways you will lose.
How would you classify a portfolio of a risk taker, risk neutral and risk averse investor?
A risk taker investor is prepared to suffer losses of erosion of capital in short term because he knows that in the long term, he will end up positive. The risk averse investor says that it for very short period of time in portfolio, I don’t want to see negative return. A risk neutral investor says that I will be smart and keep allocating based on the advice of a financial advisor, and I will switch to portfolio which will give me less loss. In a highly risk environment situation, he will go to risk neutral, in a highly growth positive situation, he will go towards positivity. So, a risk neutral investor will keep switching based on the environment in market place.
For a risk neutral investor, should he allocate 65 percent of his mutual fund portfolio in pure equity funds, 25 percent in pure debt funds and 10 percent in gold ETFs or should he make use of instruments like hybrid funds?
It is the difference between laziness and actively managing a portfolio. If you are lazy to manage equity and debt component, you give it to a hybrid fund. Balance fund is 65 percent equity and 30 percent debt which fits the definition of risk neutral. Within equities, there are large, small and mid-caps.
The active allocation is to those can enhance your returns or minimize your risk. When economy is in a cyclical upcycle, mid and small caps are better than large caps. Whereas in a downcycle, large caps are better. By giving it to a fund manager who manages for a hundred of investor, he will take a very weighted average approach. But you want to know your risk appetite and choose even in a risk neutral scenario.
If you have to actively manage then within that 60 percent for then risk neutral, the proportion to put large, mid and small is something with the help of advisor and you can manage return and minimize risk. You can lose that aspect if you are giving it to balances fund or MIP which is 35 percent equity and 65 percent debt.
Actively manage hybrid portfolio of your own, rather than passively giving it to a fund manager and saying you manage it. When you are taking a hybrid, you are taking on that fund manager’s view. Suppose you are doing active management, then you can split the large cap to 3 fund managers, split mid and small cap to three each.
You are getting diversification across fund managers processes rather than depending on one fund manager to do it. Most balanced funds try to protect the investor and are large cap oriented in equity. The right way to manage risk is to actively manage risk and not stay passively by giving money to fund manager.
If somebody has only Rs 1,500 in his SIP, then may be that option is not available.
In equity mutual fund, Rs 500 is minimum amount. Some schemes have only Rs 250. So, the person who has got Rs 1500, after 5 years he will have Rs 5000 and after 10 years he will have Rs 20,000. Unless he learns from Rs 1,500 to manage actively, when he will reach Rs 10,000 how will he learn and adjust? However small is the amount, the mutual fund industry has small enough allocation to actively manage the portfolio. Just because it is small, there is no excuse for laziness. Let him actively manage even that small one.