The Mutual Fund Show: SIPs Are One Part Of Mutual Fund Investments. This Is The Other

Some of these strategies or these mantras that we are told or taught by the mutual fund industry and the finance industry, they were relevant at that point of time, when they started way back in 1995. Some or the other way, they have started losing significance and I can share some data. We’ve been saying ‘buy and hold’ for a long time. If ‘buy and hold’ was really working, then how come these statistics reveal that equity as an asset class, investors stay invested for not more than 2-3 years. We’ve been speaking of ‘buy and hold’ for the last 25-26 years.

Naturally. Now, you tell me whether in 2008-09 the markets corrected by 60 percent. I am asking this to the advisors who are giving this mantra. Did you or did you not panic during that time? The answer is, they also panicked at that time and that’s the reason they also exited from the asset class. How do you expect your investors to stay put during such volatile times? So that volatility is when these investors need protection. What the industry isn’t really understanding or realising is that there’s no strategy for downside protection. Everybody is just concentrating on upside participation. So, when you have a smoother journey, then investors will naturally stay for longer periods. But when you have a volatile journey, like an ECG of a heart patient, you will definitely panic and move out of the asset classes and maybe go back to where they came from—the traditional investments.

SIP is just a strategy. What people don’t realise is that they’re treating it as a product. It’s a way of investing in equity as an asset class slowly and steadily over time. After some time, SIP is nothing but lump sum. When I ask this question to audiences—including the advisors or the investors, who I address on a regular basis—that if I have a portfolio of Rs 5 crore, which was through a lumpsum strategy and I have a Rs 5 crore portfolio which was developed through a SIP strategy, which one is more susceptible to volatility? The answer is clearly that lumpsum could be more susceptible to volatility.

People give that answer, unfortunately. If the markets correct by 50 percent, both the portfolios will correct. So, after some time, SIP is nothing but lump sum. Should it or should it not be protected? Let me give you an analogy. You play cards during Diwali? You go with say, Rs 10,000 and you make say, Rs 5,000 on that, you give that Rs 5,000 to your wife and say, I will only play with Rs 10,000. That is the investors’ mentality. Why are we not guiding him towards that? So far, nobody was guiding me towards that, and we were only saying, SIP karo aur bhul jao (invest in SIPs and forget) and continue your journey. So, if you see the results which I have shared with you, from 2005 to 2008, when you did a SIP of Rs 10,000 per month, it is Rs 3,60,000 and that went up to almost 7-7.5 lakh. Giving you some absurd returns of 50-55 percent etc and then we said, SIP karo aur bhul jao. Poor investor continued his SIP journey. By 2009 March, that Rs 4,80,000 which he had invested came crashing down. When they think that SIP is a product and not a strategy, over a four-year period when you delivered negative returns, would they or would they not stick with this as an asset class or as a strategy also? So naturally, they ran away. Something similar is happening in 2017 to 2019.

If you remember we had done a show in May 2018 when we had spoken about why we exited. We exited in July 2017 because the markets had become extremely overvalued as per the algorithm which I have developed. And we were into a dynamic asset allocation fund. Since then to now, dynamic asset allocation funds have delivered almost 8.5-9 percent. Small caps are bleeding, in spite of this market having gone up to the new highs today, mid-caps are still bleeding, multi-caps are maybe giving similar returns as your dynamic asset allocation fund and your large caps are marginally better because of the polarisation of the 10 to 15 stocks really running away. So, this journey is what we are trying to say is that you must give a smoother journey to your investors rather than a volatile journey and say, buy and hold etc.

At higher valuations what we’re trying to say is that, please go from an aggressive asset class to a conservative asset class, which can be a dynamic asset allocation fund.

Absolutely.

Yes, you define what is aggressive. Aggressive schemes are your equity schemes, sectoral funds, mid cap, small cap etc. So, those are market cap biases. Conservative would be either dynamic asset allocation fund which moves between 30 percent to maximum 100 percent in the equity or it can be equity saving fund or it can be liquid fund if you want to go to pure debt. But when you go to pure debt and since July 2017 to now, markets are in their red zone and perceptibly it’s still going up. So naturally, your investors will start questioning why have you taken me into debt when the equity markets would start doing well. But dynamic asset allocation fund is equity as an asset class—not only from a taxation point of view but it marries fundamentals to equity investing and disinvesting. Buy low, sell high, constant profit booking, not creating Abhimanyu’s out of the equity investors. They are not stuck in a chakravyuh (defensive formation) then.

If you see this chart itself (See video), from 2014 to 2019, which is a five-year period now, the yellow line is the mid-cap line, and it’s the journey of the mid cap index which has gone up and then, come down crashing. The light blue line right at the bottom is the small cap. Look at the journey. So, did you or did you not know when to exit when the markets were at peak in the small cap and the mid cap categorie? The answer was clearly no.

So why we have chosen the last two years is because my algorithm showed exit out of equity in July 2017. So, this data is from July 2017 to now. Again, you can see something similar where your small cap, mid-cap and multi-cap are all underperforming dynamic asset allocation fund and again, Nifty 50 which is the large cap fund— large cap space, has marginally outperformed. Look at the journey of the investors in each one of these categories.

No, it will not be a wrong strategy because on a long-term horizon, asset allocation has outperformed ‘buy and hold’ whole strategy also. But having said that, you divide the market into the three zones—red, yellow and green—depending on PE, PB, combination of PE, PB, dividend yield, momentum analysis, trend analysis etc. You decide what you want to follow and follow that to the T and once you have the green zone. Once the market comes under the green zone, why would you be in the dynamic asset allocation fund, why would you not go back to the equity fund? Because you want to take full potential of the upside. Because when the market is in the green zone dynamic asset allocation may be 100 percent in equity, because that’s the nature of the asset class. But once the market starts going up it will start reducing up from 100 to 90 to 80 to 70 but between the red and green zone there is that yellow zone— I want to capture that and that capture will happen when you actually switch to pure equity funds again.

First, the viewers must understand what the asset allocation strategy is. When you’re in asset allocation strategy and you’re following it till the T when the one asset allocation class is risky, which is equity I am talking about and referring to right now, that means the valuations are high, why would you take unnecessary risk in the other asset class because that’s the asset class which is supposed to be temporary parking of the funds so that finally you switch from that debt to equity when the market becomes cheaper. Because when we moved out of equity as an asset class at the expensive valuation zones, you were expecting that the markets will correct and when the markets are correcting why would you take extra risk in the credit risk space. But I am not against the credit risk space.

So, let me qualify my statement again so this is for the viewers to understand why credit risk space should not be a part of your asset allocation strategy. Because you’re taking risk on both the sides—the equity side and the debt side. But if you understand credit risk, it’s a very clear nomenclature; it’s a credit risk so there will be defaults, downgrades, delays in interest payments or principal etc.—take it in your stride. Because once you take it in your stride because this particular percentage of that holding it will be miniscule in that overall portfolio of that scheme—that’s one side of the story but you have only a small percentage of your client’s investments into that scheme so on the overall portfolio of yours that blip is so miniscule that people are just unnecessary panicking. So, if you write that and the accrual of the rest of the space because there is a 10-12 percent kind of an accrual. Let’s assume that there are two or three defaults, with two or three percentage of points shaved off from your returns, you are still in the usually positive territory versus a ‘AAA’, which will give you only 6.5-7 percent.

And then you stop listening to that negative noise around that.

See, point-to-point returns is a postmortem of what has already happened. So, it can  be last six months or last one year. So, one year ago if you had invested in your scheme, let’s assume in the equity scheme when the markets really were at the rock bottom and you had invested. So, let me give you two examples. If you had invested in equity in January 2008 and if you do point-to-point returns of Nifty 50 till now which is 11 years, it’s 5.5 percent only. But one year down the line, if would have invested in March 2009 when the markets were at its rock bottom and from then to now, the Nifty 50’s return is almost 15 percent. So, how do you gauge that this is good, or this is bad. So, point-to-point is a postmortem of past performance— that’s one of the criteria.

What does rolling returns tell you? That if I had invested from 2001-19 anytime 2002, 2003, 2004, XYZ, and after that I held it for three years or for five-year period any of these observations, what’s my return. So, the rolling returns analysis throws up three things—the minimum return, the maximum return and the average return and finally the standard deviation also. So, when you have the minimum, maximum and average, nothing can be hidden. All the observations are covered and if you show the audiences the chart which I shared with you. The top portion (See video) is the point-to-point returns which was as on June 1, 2013, and backward six months, one year and three months etc. and the returns are in that 12-16 percent category. This is a debt scheme with one month exit loan. So, whenever somebody is coming into this scheme that means his time horizon is not more than a month. He can stay for more than a month but typically because it’s one month exit debt product, I will come here with a one-month investment horizon. After looking at this particular data if I would have invested in this scheme from May 2013–May 2014 anytime in this period that daily one month rolling return shows that the minimum return was negative and the average return was 4.5 percent and 63 out of 233 observations were negative. Now, looking at the rolling returns data would you have invested in this scheme? That’s the power of data, because here good, bad, ugly everything is there and then with your eyes open you say I don’t mind investing, that’s the call you will take with your financial advisor.

I have been telling the advisors who I mentor that if someone shows you point-to-point returns, throw it in dustbin. Insist on a rolling returns analysis and then take a call because that gives you a consistency of returns analysis. Now, let me ask you this question if the underlying securities are earning you 7-8 percent which is on debt side can you sustainably get 15-16 percent returns? Answer is no. So, 99 percent of time based on the past performance the story is behind you not in front of you, especially in an asset class like debt.

Absolutely.