A security guard stands outside the BSE building in Mumbai, India. (Photographer: Adeel Halim/Bloomberg News)

The Mutual Fund Show: Invest In These Schemes Amid Market Rout

Investors should opt for multi-cap funds amid volatility in the market, suggested Jinesh Gopani, head of equities at Axis Mutual Fund.

The divergence between large- and mid-cap indices is at its highest in a decade, Bloomberg data showed. While the Nifty 50 Index declined nearly a percent so far this year, the Nifty Midcap and Smallcap indices slumped 21 percent and 34 percent, respectively, during the period.

Small- and mid-sized companies grow faster than their larger peers in an improving macro environment, Gopani said at BloombergQuint’s weekly series The Mutual Fund Show. A divergence, he said, occurs when the macro picture turns negative.

Gopani said the market volatility is expected to prevail in the next six months. He, therefore, advised investing in multi-cap funds, where investors can put money across market capitalisation, in a phased manner.

A fund manager, Gopani said, doesn’t take excessive risks in such schemes and invests in the best of large, small and mid-cap stocks. An index fund, however, is restricted in terms of the stocks that a fund can invest in. Such funds are ideal for an investor looking to track an index, he said.

Watch the full interaction here:

Also read: IL&FS Crisis Spurs Biggest Monthly Outflow From Liquid Funds In A Decade

Here’s the edited excerpts of the conversation:

The point that everyone is making is on divergence within the market. Large caps or Nifty stocks or Nifty 100 stocks haven’t done as badly as mid and small caps. Divergence is largest that we have seen in a while. Is this a sign of more pain to come or is this the signal of froth in mid cap being out of the system or is it difficult to find a signal?

Jinesh Gopani: There’s a signal. Whenever you are on an upper trajectory of GDP, when your macro is very good, normally mid- and small-sized companies tend to grow faster than large caps. Now, the macro has started to weaken. May be not to a greater extent, but higher oil prices and rupee depreciation, their impact on trade deficit, fiscal deficit, inflation, higher interest rates will shave off some of the growth.

At this juncture, people would want to exit mid caps, if you have a view that oil will go to $90 a barrel. So, better to be with large caps, they have the wherewithal, they can protect margins, they can grow and gain market share. For mid and small caps, the problem will be that raw materials margins for some of them will go up. Growth might get distorted. You don’t want to take risk when you are at a valuation of 20-40 times. Suddenly if growth falls from 30 percent to 15 percent, there is a divergence. In a bull market, mid and small caps will give you bigger divergence, whereas on weakness of macro, you will see otherwise.

If somebody has a long-term horizon, then equity funds from a 2-5-year perspective give the best bang for the buck or is it unclear because of the near term looking a bit hazy?

Gopani: It is better to be cautious at this juncture. The good part is that the stock prices have corrected in India at least. The index is down 35 percent and mid caps are down 25 percent year-to-date. Only the good mid and small caps and quality large caps will perform well in this scenario. You are in a mid-way. You will have some negative surprise on earnings growth because of margins or growth impact. You have 5-6 months where there will be too much volatility. If oil prices come off by $10 then, India is a rockstar. But if it goes up then we are in a further bad shape. You have to see higher interest rates which can shave some of the growth structure. Wait for 6 months and slowly invest. You are in an election season and there will be volatility around it. You have another 5-6 months to invest with a 3-5-year horizon.

For multi cap funds, will you say to invest in a phased manner and start slow right now?

Gopani: It is always good to invest in a phased manner. Invest 30 percent lump sum, so that you don’t miss out the opportunity. But if you are seeing a road which is bumpy, you have 5-6 months to invest. By May, you will come to know many things. If the U.S. is going bad, you will see corrections happening. We will see how election season pans out. If there is a decisive mandate, then just go and invest. By that time, the impact of oil on the economy will also be seen. Unfortunately, everything has come together. We might wait and do 30 percent lump sum and go for staggered investments.

Have you been receiving funds or have there been redemption pressures in your multi-cap scheme as well?

Gopani: As of now, there is a net inflow. There has not been any redemption in any of our schemes. It is too early to judge because you had a good August and a bad September. Again, you are seeing swings happening. Too early for investors to decide that whether you are on the buy side or negative trajectory. There are a few pointers like oil prices, rupee depreciation and further losses in small and mid caps, and then we will see a slowdown in flows. As for us, there has been market share gains because of the performance. If you are looking like a quality portfolio, then people are ready to park the money.

What will be the trajectory of a normal multi-cap fund? If somebody is investing for a 5-year horizon, do multi-cap funds have wherewithal of outperforming the benchmarks and other categories in a meaningful way?

Gopani: I will give the case study of a long-term equity fund which we have managed from Rs 1 crore to Rs 15,000-16,000 crore. On a CAGR basis, we are at 17-18 percent, whereas the index is at 8-9 percent. If you are happy with those type of returns, then it is the best approach to be in.

Would you believe that multi-cap funds from here on to the next nine-odd months, if scenario stays as it is, will have a lot of buying opportunities?

Gopani: If things improve, if macro improves, then mid and small caps will come back.

But you can’t increase the allocation northwards of 50 percent.

Gopani: If you are less than that in this juncture then we can park your money. As of now, we are more on large caps. We can go 100 percent in large caps also. But you can increase allocation to mid caps. You have 50 percent mid and small caps and 50 percent in large cap. We should look at oil and rupee as critical parameters. If both are on our side, then India is a great story. If both go against us for some time, then we will have volatility.

Many fund houses are relaunching or launching fresh small- and micro-cap category. If you as an investor has to park money in any of this right now, would you choose multi-cap, small-cap or a micro-cap fund with an assumption that your time horizon is northward of three years?

Gopani: Still I will go for multi cap. Always have a balanced approach and no need to take excessive risk. From Rs 100, either I park Rs 10 in small cap or the entire Rs 100 in multi cap. Both ways, the returns will be more or less similar. It depends on the risk appetite and what kind of returns you are looking for. If you want to double your money, then small cap. But I don’t want to lose. It is hard earned money and there is a big risk when you are in small cap. So, either you go into three schemes or one, your average five-year return will be more or less same.