The Mutual Fund Show: Time In The Market Is Better Than Timing The Market
Investors shouldn’t look at events occurring in the market, but at asset allocation and investment objective, says Nilesh Shah.
Should investors be worried about putting in money in mutual funds amid elections, usually a period of volatility?
Investments must be made at a given time rather than trying to time the market, according to Nilesh Shah, managing director of Kotak Mutual Funds. “If investors are taking time out of the market, it is like playing in a cricket pitch looking at the wicket-keeper rather than the bowler,” he said during BloombergQuint’s weekly series The Mutual Fund Show. “Experiences taught us that it is time in the market which makes money for you rather than timing the market.”
Investors shouldn’t look at the events occurring in the market, but at asset allocation and investment objective, he said, adding those who are willing to bear the risk of uncertainty could be rewarded higher. “There’s no free lunch in any market.”
Watch the full show here…
Here are the edited excerpts from the interview:
Lot of people investing in mutual funds might wonder that there is volatility a month before and after during election season. Should I sit out of mutual funds for the time being because I lose out of on four months and it doesn’t matter and I will come back after two-four months and resume my investment? If the period looks volatile, then I will have a break? Do you think people should make use of volatile times like elections?
If you are taking time out of the market, it is like playing in a cricket pitch looking at wicket-keeper rather than the bowler. Experiences taught us that it is time in the market which makes money for you rather than timing the market.
If in 2013 you would have taken a call that there will be stable government post elections then you could have invested in the Sensex which was at 18,000-19,000 points. Today at 38,000, it is a reasonable return. But if you would have waited for elections result to come out in May 2014 and then invested, you would have probably entered Sensex at 28,000, and then 28,000 to 38,000 is good, but it is not as good as 18,000-38,000. Market has to be invested in at a given time rather than trying to time it after all the uncertainty. There is no free lunch in any market. Because you take the risk of uncertainty, your reward will be higher. If you don’t take the risk of uncertainty, your reward will be lesser. My recommendation to investors will be to please not look at the events. There will be many more events which will keep on happening in the market. You have to look at your asset allocation and your investment objective. If you are investing for retirement in 2030 to 2035-2040, will 2019 elections make a difference? Then the answer is no. What will matter is how much you invested as a percentage of your wealth in risk assets like equity real estate and how long you gave time to those investments.
Will the events of May 23 have a big bearing on long-term returns for an average mutual fund investor?
Election results are very critical on the result day. In 2004 election cycle, we saw that markets had corrected almost 15 percent on the result day because it got a shock from the election result. In 2009, markets were up 20 percent because it got a surprise from the election results. What happens after elections which makes material impact on investors return was exactly opposite of what happened on result day. In 2004, on result day, markets where down about 15 percent but thereafter we saw the biggest rally of our life. The Sensex moved from 4,500 to 21,000 in January 2008. In 2009, investors were richer by 20 percent on the day of election results but post that it was a very subdued market where index barely moved from 15,000 to 18,000. Election results matter on the result day. If market has priced in some kind of a government and if there is a surprise or a shock to it then there will be material movement in market. But after five years, what is the space of the economy? What is the work done by the government? What is the corporate profitability? Those kinds of fundamentals will determine investors return. So, we have to look at what is in our control, which are the fundamentals of economy rather than an election kind of event.
Would it be prudent for mutual fund investors to try and time the markets this time around because we are at highs, there is volatility and there is no clarity on what the global scenario is looking right now? Should one ponder over that?
I will always go by asset allocation principle. I have the humility to accept that there is no way I can time a market. I haven’t met a person who can predict tomorrow. If you are overweight equity, then certainly this is the time when you should book your profit. If you are underweight equity, despite high valuation, you should invest into equity market to become neutral level. If you are neutral weight to equity to your investment objective and risk profile, then this is the time to maintain neutral weight and continue doing your systematic investment plan. It is not the valuation of market which determines what you should do. But also, along with valuations of the market, your own risk profile and investment objective in asset allocation which determines what you should do. If you believe that market is overvalued, and you are overweight then please take your profit. If you believe that market is fairly valued, and you are under invested in equity then please continue investing via systematic transfer plans or SIPs.
From March 2009 to May 2009 for banking funds or even banking funds on March 2014 to May 2014 and post that the quantum of returns may vary, but the returns have been positive. Past returns may not be a guarantee of what future could do. But are they indicative of what markets can do? Investors may get perturbed but smartly invested money, using volatility as a tool rather than anything else might lead to better returns from mutual fund investing.
If we see the market, it is at a slight crossroad. There has been some amount of economy which is showing “subdued-ness”. Auto sales in February and March have been a disappointment. The white goods sales have also been a disappointment. Investments are picking up but at a much gradual rate. Somewhere, this softness of the economy and this below-potential growth rate is not negative but positive growth rate but it is below potential growth rate. It is being ignored by the market. There could be a couple of reasons as to why the market is ignoring it. The market has priced that the government will be fiscally prudent. Your better macroeconomic fundamentals indirectly result into higher valuation. Second, the market is also expecting real interest rates to come down. For the last couple of years, the RBI managed to bring down double-digit inflation to lower single digit and this was achieved with tight liquidity and high real interest rates. As inflation has come down, it will also bring inflationary expectation down and this will leave the RBI to bring down real interest rates in a significant manner. Bringing down of real interest rates will be beneficial for corporate profitability. Third, we have also seen tight liquidity especially after September 2018, where due to effect intermission and increase in currency circulation, banking liquidity has been restricted, and this has an indirect impact on credit. Without credit, investments can’t happen. Without credit, working capital can’t be financed. There is some impact on growth because of limited liquidity. Generally, currency in circulation starts decreasing after elections. We hope that the RBI’s innovative solution like forex swap along with currency in circulation coming back post elections will provide necessary liquidity for the economy to provide credit and growth. The third thing is related to transmission of credit. Especially after the IL&FS default, there has been pressure on transmission of credit, and this has deprived certain critical parts of the economy from expanding at a faster pace. Real estate, infrastructure, SME—all these sectors are working with a limited credit rather than abundant credit. So, market is pricing in that, fiscal prudence will be maintained, real interest rates will get normalised and come down, liquidity and transmission of credit will improve. Combination of these will result in a better earnings growth in the days to come.
There’s better economic growth and hence market is ignoring little bit of subdued-ness and a bit of below potential growth in economy right now. Another thing which market might be considering is that optically, some earnings will look far better in FY20 over FY18 or FY19. Corporate focus private banks in absence of making large provisions for NPAs will collectively show much higher profits in FY20 over FY18 and FY19.
Pharma companies with generic presence in the U.S. market will also be able to show better profit in FY20 over FY18 and FY19. Some of the conglomerates having a global presence, which have recorded one-time losses in FY19, will not repeat those losses in FY20 and hence that number will also look good. So, optically there might be better earnings growth in FY20 led by corporate focused banks, both private and public, generic focused pharmaceutical companies and conglomerates, and this will also support the market.
Would you believe that the under-performance of the broader end of the spectrum where retail investors either via direct participation or via multi cap or small cap and mid-cap funds have also been large participants, will that under-performance correct itself not in next six months but over a course of next 1.5 years. Do you see broader market companies showing growth and thereby price performance?
For a broader market to outperform, the economy has to pick up the momentum to reach its potential growth rate. We have built the platform or foundation in the last couple of years to go to that higher potential growth rate. Our tax compliance has improved reasonably well compared to past—from 10 percent tax to GDP growth in 2010, gradually it is expected to improve to 12 percent in FY20.
We have reduced complexities of doing business by jumping up in ease of doing business. Infrastructure has been built. Our rupee has been fairly valued and hence Chinese dumping or our large trade deficit with China will be controlled. On top of it we have built solid macro foundation with lower inflation which allows us to pump liquidity, cut interest rates and if we can do better transmission, combination of all these factors will result into the economy reaching its potential growth rate and that will be beneficial to corporate earnings growth and that will allow broader market to catch up with few better performing stocks in large-cap indices.