From Asset Allocation To Battling Despair: Investment Advice From India’s Top Mutual Fund Managers

Choosing the right investment strategy is imperative to ensuring steady returns amid an economic downturn. A small change in approach can make or break an equity portfolio.

BloombergQuint spoke to the heads of six mutual funds that collectively manage over Rs 3 lakh crore in assets at the CafeMutual Conference on the best way to navigate through uncertainty.

Watch the conversation here:

Edited excerpts of the conversation:

Hope, Despair In Markets

Prashant Jain, executive director and chief investment officer of HDFC Mutual Fund:

The best correlation of future returns is with the valuation of entry points of your investment. The fact is market value-to-GDP ratio is near all-time lows. And the fall in interest rates is a far bigger positive for corporate profitability and the valuation metrics. Add to that the near similarity between earnings yield and bond yield—and past instances have shown that future returns from such points are always attractive. The fall in corporate tax rates and interest rates are far bigger positives that GDP growth faltering for a year or two. 10-year returns of large caps and mid caps have finally converged.

Navneet Munot, chief investment officer of SBI Mutual Fund

The net profit-to-sales ratio of the top-500 companies has been 6.8 in the last five years—the lowest since 2002. The peak of this ratio was 13.8.

S Krishna Kumar, chief investment officer of equities at Sundaram Mutual Fund

Waning risk appetite and flight to quality leaves smallcaps in disarray, he said, adding that he takes heart in the near-20 percent discount smallcaps are trading at compared with largecaps. He pointed out these stocks also trade at a discount to the long-term averages of their respective indices. The pace of recovery in the economy though, will determine how the mid and smallcaps move, he said.

Amandeep Chopra, head of fixed income, UTI Mutual Fund

The cut in (benchmark interest) rates (by the RBI) won’t drive market appetite, he said, pointing to the waning reaction of bond markets over the last few rate cuts. Chopra said it will be difficult to stimulate growth in India with the global economy slowing.

On Asset Allocation

Avnish Jain, head-fixed income, Canara Robeco Mutual Fund

Gilt funds delivering double-digit returns without credit risk shows good returns can be made in debt funds too. A clean fixed income portfolio can deliver good returns over a long period of time.

Anoop Bhaskar, head-equities, IDFC Mutual Fund

Generic funds. Small-cap or thematic funds generate the highest returns, but they have risk. But if one has a three-year horizon, then the best segment would be small-cap funds. The caveat is that investors will have to stomach significant volatility during the holding period. It’s time investors start making an allocation to fund managers who run a value-oriented style of investing as opposed to growth. Growth has beaten value over the last decade and there should be no hesitation to have some allocation to funds which have the value-oriented style of investing. There will be pockets when value-cyclicals return and the returns are very sharp in these cycles.

Active Or Passive Funds?

Prashant Jain

The advent of total return index puts active funds at a disadvantage. And in a low-return environment, the discount of value over growth is at historic highs. Active managers inherently have a value bias. I’m optimistic that over longer periods, active managers still have the advantage.

Anoop Bhaskar

The concentration of passive funds is very high compared with global comparables, largely because the top-10 stocks have high weight on the indices and also because the top 2-3 companies in every sector have disproportionate weight in the sector. The Employees' Provident Fund Organisation should invest in midcap funds, too, so that passive investment is broadbased.

Navneet Munot

Both passive and active investing have a long way to go. And there would be space for other instruments. Research arbitrage and reaction to noise in India will always create an opportunity for active investing. The passive industry’s growing size will eventually become a disadvantage globally.

How To Pick MFs?

S Krishna Kumar

Track record of fund managers and their longevity in the particular asset management company. The style drift of the fund is also a very important barometer.

Avnish Jain

Low credit risk and low-duration risk products are the most preferred choice. During some short periods of time, duration funds can also give returns, but I largely believe in low credit risk and low duration products for fixed income investments.

Prashant Jain

Read “Common Sense in Mutual Funds” by John C Bogle

Anoop Bhaskar

About 50 percent of money in mutual funds in the first quartile and the remainder in funds in the last quartile. That’s because funds which outperform over 1-2 years invariably don’t remain outperformers in the next few years.