The Mutual Fund Show: A Strategy That Can Help Cushion Portfolios In A Crisis 

Bajpai: So yeah, just the way said there is no formula or a magic trick which can make a portfolio pandemic proof. So, something that we need to remember is that you know a Black Swan event like Covid-19 is not something that we can actually totally prepare for. What we can prepare for is downsizing the damage that such an event can do. I think it’s time to go back to basics and check your asset allocation. That’s the first step, because if you already had your asset allocation well solidified in place with your allocation in gold, the requisite amount in equity, fixed income, I think one would definitely be much less concerned at this time. So I think it’s time to go back to basics, and see whether your asset allocation is right there, correct or not. And when we talk about such an event, of course you’ve seen the equity markets being the most impacted and that’s something which has happened globally. I think with a more process-driven approach, where we’ve seen the P/E levels in January of 2020 touch about 28 and by March they were down to 17 and again, we are seeing a relief rally or whatever you can call it—FIIs are pumping in money and the P/E is again up to 24. So I think at this time, it is very important to again realign your asset allocation, have your allocation to each asset in the correct manner and just sit with some funds in a liquid or low duration category because we really don’t know what we are in store for.

Jain: So, ideally, the investor needs to follow three basic principles.

Jain: So arbitrage funds are a natural hedge against any downfall in the market. To all our large family offices, we advised them exit from equity mutual funds on Jan. 16, 2020 because we were feeling that market may correct with time and probably, our group philosophy also is that invest slightly, switch timing. We believe in timing. We are a new school of thought. We don’t believe in only spending time in the market. We believe that you have to time the market as well. It is not important that you have to play every ball, at times you have to dodge the ball if you really want to make money. So you have to time the market, and that’s what we did with investors. So we advised them to move from equity to arbitrage funds from Jan. 16.

Bajpai: I’d just like to point out one thing that all of us I think we are often swayed by the recency bias that means that we like to go and pick up, or move into an asset class where we find comfort in terms of some good returns. A lot of investors are scared of the debt category and I think that somewhere probably that has resulted in a move towards the arbitrage fund space. Having said that, I would say for a time duration of 0-3 months, I wouldn’t be very comfortable with arbitrage. I think one should have a vision of at least six months to be in that category.

Bajpai: Because there might not be enough spread out there and the opportunity might not be there to really make money from the difference between the spot in the future markets on the system that it plays. And if those opportunities are not there, eventually they end up parking money in the liquid space itself.

Jain: I think we are fine. We are not really fixed on arbitrage and liquid to be honest.

Post-tax returns you will find it better in arbitrage funds. When the market is volatile, which we are expecting market to be, then you will find these opportunities even in the short term. For example, market was 7,500, now back to 10,250. So, in a volatile market you will always find opportunities in arbitrage. So, I disagree with that thought that you will not find margin. So, the market is going to be volatile and the volatility is going to be here in the next six months for sure because of a lot of geopolitical things happening in the world. So we prefer arbitrage funds over it and post-tax return in arbitrage will be better.

Bajpai: The post-tax return it’s basically for people in a way higher income slab and not for everyone. So obviously for somebody who’s in the higher income slab, for them it would make sense but not for everybody. That advantage won’t exist.

Jain: We advise family office of only above Rs 100 crore.

Bajpai: We are living in a world where we are already in a ‘slow-balisation’. A little slow paced globalisation since 2008. And in the last one or two years, we’ve actually seen trouble between China and the U.S., and the protectionism kind of approach has been taken up. So if you talk about de-globalisation, that means that everything right from trade to cross-border flow of trade and technology, the investments everything would be impacted. So, it’s very difficult to pick a sector which will actually do well when you are saying de-globalisation. Why technology and healthcare is doing well? If you look at the Nasdaq 100 index, it’s up by about 9%, but the S&P 500 is barely up 1% year-to-date. And the primary reason for Nasdaq 100 to do well has been that it is 45-50% technology-driven, followed by the healthcare biotech sector, and these two are the biggest beneficiaries as of now. You know all our interview calls are technology, mobile and cloud-driven, and of course with the Covid pandemic, healthcare sector is what everybody is looking at. But again, how long will it last? It’s difficult to pick a sector which will do well in the de-globalisation space, especially in India, I think it’s a tough call. It’s always best to stick to market leaders, I feel, across different space. I really don’t have a very clear view on which theme should one pick. I’m not a big promoter of picking thematic funds actually. I like the diversified space and I find comfort there.

I would like to add one more point—when we’re talking about mutual funds at least, we always promote them with a medium- to long-term horizon. So, this statement and decision based on an event or something which is an outcome of an event, I think is not the right thing to do. That can be the right way to pick certain specific stocks, if you are going to direct equity, but I feel as far as mutual funds are concerned, the way to diversify and build your portfolio has to be different.

Jain: First, in thematic funds we are allocating only 15% of the portfolio, not 100%. We are talking about next six months staggered investment. That’s the process we follow. Every bull market has its own sector. In 1996 to 2008, Nifty was leading with the asset-heavy business models. Take ONGC, GAIL, JP Associates, they were leading those days. Post 2008, it’s an asset light model that has well done very well, which is the banking sector and they were probably 43% of the weightage when we advised exit on Jan. 16, 2020. The banking weightage was around 44% in the Nifty. So, every market and every phase of the economy has a new sector which is needed. So, you should be able to identify the winners well in advance. At Ashika Wealth Advisors, we believe in pre-empting the cycle of asset class and sectors, we’re doing a post-mortem. So there’s a thesis which we work with. Once you understand the thesis, I can brief with what sectors we are comfortable with going forward because we believe that it is going to be a de-globalisation going forward because there will be a lot of geo-political issues. So, keeping de-globalisation in mind, we have five sectors where we feel comfortable with for 15% of the allocation.

Jain: Specific to mutual funds, I think we are comfortable with manufacturing sector. 5% out of 15% allocation can go into the manufacturing sector.

Jain: Something like ICICI Manufacturing Sector Fund or you have Aditya Birla Manufacturing Sector Fund where you can put money, 5% into it out of 100. So, 5% can go healthcare and 5% can go to IT sector as well. Anyway most of that diversified equity mutual fund is invested into banks. That’s how their portfolios are. Today, any large-cap mutual fund and you by default carry 40% or 30% weightage into banking stocks. So, don’t get into banking again because you’ve already got a banking exposure.

Jain: Choosing the investment on the basis of large, mid or small-cap is an old school of thought and we don’t believe in that. I will give an example. There are a lot of stocks which were large caps in 2007. Today, either they don’t exist or are mid caps. To name a few, something like BHEL, a Navratna company in 2007, today it is hardly a mid cap. ONGC of the world, JP Associates does not exist. DLF, the price was Rs 1,300, today its down to Rs 100. They were large caps in 2007. A lot of companies don’t even exist today. Unitech of the world. So we believe that if you really want to make money going forward in India and across the globe, you should discard this old school of thought where you diversify your investment based on large, mid or small cap. You should invest into a right sector. Your mutual fund schemes should invest in right sectors and at right entry and exit points.

Jain: If I have only three categories, then I will choose multi cap.

Jain: We believe in multi-cap funds from a three- to five-year perspective because the fund manager has more flexibility in choosing the right stock at the right time. Then we’ll leave it to the discretion of fund manager.

Bajpai: Going back to basics, why did the person invest in a large-cap fund in the first place? Probably, you did have a time horizon, you had a risk appetite, and for a certain reason you invested in a certain category. Now, during the journey, just because the train probably seems to be going faster, you don’t go in, get on that train and there might be phases where something which is sluggish, currently will catch pace. So I don’t think that an allocation has to be made. What happens with the large-cap space that broadly when the indices are doing well, let’s say our Sensex and Nifty, and people feel that their funds are not doing as well or they don’t see that kind of recovery, that’s because the allocation is probably spread out into mid cap, multi cap, small cap and a bit of large cap. And I think an index fund, somebody who is wanting to do it and is starting right now, can probably just pick an index fund to find that comfort, and somebody who has already invested, I think you have to kind of stick to why you did invest in the first place. I don’t think that it makes sense to move out or move in a category just based on a certain trend which has been there for a short time.

Bajpai: I think it would depend. I think either of the two things is okay. One can pick an index fund that would also give the exposure to the largest companies and somebody who is investing in a large-cap fund will also have an allocation of 80% in the top 100 stocks. And if your fund manager does the trick right, you might end up beating the index. But closely what we’ve seen that scope has reduced over a period of time. So I think just picking an index fund for a beginner is a good thing because there is the comfort to that person that okay, I’m in line with the markets and it’s very easy to understand how the product performs and moves, basically which is market related.

Jain: Going forward, we are not a believer in debt mutual funds. I will give you two reasons — accrual category and duration category. Accrual category — we feel if this pandemic goes for long, we may face a lot of default on the bonds, at least in the BBB category. For duration debt mutual fund category, we believe the interest rate has almost bottomed out. There’s hardly 0.2-0.5% which may go down, even if it goes, but we don’t believe that the rate of interest will further go down at least in India. Unless the U.S. goes into negative territory, you will not find India further cut rate of interest. So duration mutual funds performed very well when the rate of interest cycle is declining. A lot of duration mutual funds have given a return of 18-19%, 15% in the last one year compared to the accrual debt category of funds, which has given 7-9%. So that category may not be very fruitful, going forward, to invest, because rates of interest are going down so accrual will also get a little unattractive and duration anyway will start reversing the gains if the interest rates start going up, say after six months or a year’s time once we pass out this pandemic phase. So debt mutual funds we are anyway advising to be avoided at least from a one to one-and-a-half year point of view.

Bajpai: It’s not that we’ve turned averse to the debt space. I think there’s always scope. I’ll like to stick with a portfolio which has quality and which is for a shorter duration as of now. Because we’ve seen the government bonds hover between 4.8-9.4, and if we take the average of seven, we are much below it. So this is not really the time to invest in something for a longer duration. The interest rate risk will be way higher. I’ll like to stick with something but just for a shorter duration with a high-quality portfolio.