The Mutual Fund Show: What You Need To Know About Two Latest New Fund Offers

Amol: As the name suggests, this is a U.S. technology fund. It’s a fund of funds, a sort of feeder fund actually. It will invest in the JPMorgan U.S. Technology Fund. As the name suggests, as per investment mandate, it will invest in new technologies such as cloud computing, big data, or even disruptive technologies. It had stocks like Lyft, Microsoft, Synopsis, etc.

Basically, it’s a thematic fund — not a sector fund. What you’re getting by investing in this NFO are two things. You will get geographical diversification. If currently, all your financial assets are invested in India, an NFO will get you geographical diversification and also some kind of exposure to newer technologies. As always, I would also like to cover one additional point. A sector, geographical, or thematic diversification can be anywhere between 5 and 10, 10 and 15 percent of your overall portfolio. So, if you have space within that space of 10-15 percent, you can probably look at this offering.

Vishal: As Amol rightly said, this is a fund of funds. The base fund is the JPMorgan U.S. Technology Fund. That said, it is a 20-year-old fund and is fairly actively managed. It has investments in what we call emerging technologies. Now the U.S., as we all know, is a hotbed of technology. So, the JPMorgan fund invests in technologies like cloud computing, 5G, autonomous cars, etc. So, these are technologies that are already in the market but are yet to reach their mature phase. So, there’s a lot of growth which is still left in these sectors. So, even if you see the portfolio of this fund, the top 10 stocks include names like AMD, which is in the semiconductor industry or say Salesforce. Also, there are mature companies like Microsoft, Alphabet, etc. So, investors can get a wide variety of technology companies to invest in.

Therefore, Indian investors already have (access to) probably two-three funds in the industry which are investing in the U.S. market, but this would probably be the only fund that will invest in emerging technologies. From an Indian investor perspective, they have a chance to invest in these upcoming technologies. Having said that, I’ve got a couple of caveats for the investors. One is that the U.S. bull market is now in its 11th year. So, that is one thing that investors need to keep in mind. Second, these technologies are upcoming in nature, so they are emerging. So, there are chances of some failures, etc. Therefore investors probably should come by the SIP route and have at least a five-year horizon while investing in this fund.

Amol: Let me talk about the expense. The underlying fund, as both of us mentioned, is the JPMorgan U.S. Technology Fund. That fund has an expense of 0.86 percent. Now, SEBI, as per the regulations, does not allow you to jump over the 2.25-percent mark. So, the India fund, the Edelweiss NFO, is likely to have about 1.3 sort of an expense ratio. With both expensive ratios put together, an investor is probably paying around 2.25 percent of expenses.

Amol: So, some of the things that you mentioned are index funds or ETFs. This is an actively managed fund although the Edelweiss fund is a feeder fund. The host or the U.S. domiciled funds are actively managed ones. So, the cost funds are not strictly comparable. Actively managed funds even in your local or domestic Indian mutual context have a higher expense ratio level. The same holds good for this NFO as well.

Vishal: I think this fund could be a part of the portfolio, honestly because if you see in the U.S. market also, technology is now having the lion’s share of the total market capital. So, it makes sense for an Indian investor to participate in this space in some of the other ways.

Amol: If this is your first outing in terms of—this the first international fund, you could probably look at a diversified equity fund. This is because all said and done, we also have had a tech sort of a boom, tech sort of the year 2000 (Y2K) if we all remember that. So, if this is your first outing I would suggest to look at the diversified fund. This is not to say a good or bad thing about this NFO, but I’m saying that always starts with the most common or most basic element of the market. So, people also ask this question about banking and financial services fund in India, which has done so very well. But this fund accounts for about 40 percent of the market cap of the index itself. So, even if you buy a diversified fund today in India, you’re probably getting a 40 percent exposure in any case. So, I would say that a thematic fund is for a slightly more evolved investor and not really for a first-time investor.

Vishal: So, this one comes in the category of dynamic asset allocation funds. So, basically funds in this category can invest in both equity and debt. Sundaram specifically can invest up to 100 percent in equity, as the scheme information document mentions. If it feels that the markets are undervalued and they like the equity markets, then then they can go up to 100 percent. If they feel that the markets are not undervalued, and if they feel that the volatility is high in the market then they can go up to 100 percent in debt as well. So, there’s a broad area in which the fund can invest.

Also, there’s a mandate to invest up to 50 percent in the derivatives segment. So, that is also something that investors need to keep in mind. The fund will always try to capture equity taxation. So, that is good for the investors. But having said this, there are already comparable funds in the industry and as a category, if you see the premise of a dynamic asset allocation category is that the fund will invest more in equity when the markets are down and it will invest less when the markets are up. But if you see the return of the last three-five years, the category has given only 8-10 percent kind of returns. So, I would say investors are probably better off sticking to known names which are already part of the industry as of now.

What Vishal said it absolutely right. It is said that if there is an NFO, do not subscribe or apply for it till the time it doesn’t bring something new to the table. So, what is that new to the table? It is probably a new way of investment, new product class or new asset class or a combination of these or even a new algorithm. If you find if you want a plain vanilla balanced advantage fund, you have many established options in the marketplace. In fact, India’s largest equity fund is actually a balanced advantage fund. There is also a category pioneer balanced advantage fund, which is a big enough fund and one of the most consistent funds. But then having said that, most of the funds do operate between 30 percent and 80 percent band.

Amol: No. In the old balance funds, it used to be 65-35, but most of the funds did keep it to the level of 70-30. But after the scheme categorisation, balanced advantage fund points have a pretty broad mandate. About 30-80 is the band I mentioned specifically because we will go to 0 of equity in and extremely overvalued market which we haven’t seen in the last five-seven years when this category is really caught up the attention. You will go to 100 percent equity when you are at a P/E level of 10-14. Again, we haven’t seen 10-12 levels of P/E for the last 8-10 years. That’s why, if the broader 30-80 percent of the range is what you’re looking at that, then you would do best with the established options.

Vishal: Yeah, it’s a good category to be in, given that it has the mandate to move from 0 to 100 percent either in equity or debt. But I also missed out on one point which is a given out the debt scenario is right now in the country; it is better to stick to known names. The known name I would stick is the ICICI Balanced Advantage Fund.

Amol: That’s precisely the point that I was mentioning—it is a category pioneer. So, this entire balance advantage category came into being with ICICI Prudential Balance Advantage, earlier known as ICICI potential volatility advantage. So, I think that’s a pretty solid scheme to stick with.

Amol: So, after the Supreme Court verdict of last calendar year, Vodafone basically had tough times ahead of them. They found various petitions, including the curative predictions and as of now, as the things stand today, they’re supposed to make the entire payment.

Now, Vodafone promoters, both Indian as well as overseas promoters, have at least on the face of it made it clear that thwy will not be able to bring any fresh equity unless they get some kind of breather from the authorities. Now, this is about what has happened so far. But actionable for investors, basically, among all Vodafone papers that you found, debt exposure was mainly into a credit-oriented mutual fund. So, ideally, I would say that if you are looking at the credit-oriented exposure today, Vodafone would be least of your concerns because as you rightly said either the exposures have been marked down to 0 or the exposures have been side-pocketed. So, today at such a credit-oriented mutual fund as well, if you invest today, you do not have a Vodafone paper in the scheme at all.

So, I would say ultimately we will have to go back to basics, if you believe that credit management style of defined manager suits what you would like to see into your fund, then probably you can invest into credit funds. If not, there are always options and we have discussed previously in this very same show you could always look at corporate bond funds which typically invests more than 80 percent of its funds into AAA grade papers or a banking and PSU debt fund, which invests in banking and PSU companies only. These are overall felt to be much stronger companies and hence carry fewer chances of default. So far, although we have seen so many credit incidents in last one-and-half to two years, no banking or PSU debt fund has faced or has side-pocketed or even did a downgrade to zero sort of an issue.

Amol: In the credit segment, yes.

Vishal: So, those investors now have to probably wait and see how the Vodafone idea papers are serviced now. As Amol mentioned, I think most of these funds have actually now created a side-pocket. Actually, it was an interesting thing that in January when the ruling came, Franklin Templeton was the first fund hours to mark it down to 0 and mark a side-pocket.

Whereas, the other fund houses had actually a wait-and-watch approach. So, even though Crisil had downgraded the debt to below investment grade, the other fund houses actually just marked down the papers, but not created a side-pocket. But I think, probably a couple of days back, when CARE downgraded the papers to below investment grade, I think all of the fund houses had created a side-pocket. So, investors have been shielded so to speak, but actually this also raises a slightly broader point of view that this was a company that was known to have probably Rs 1 lakh crore of debt on the balance sheet as of FY19. It was loss-making and had Ebitda of just Rs 4,700 crore and an interest expense of double of Ebitda, which was almost Rs 9,400 crore.

So, why would fund houses or schemes who own debt papers of a company like this? I mean it is obviously 2020 in hindsight but still, I would say, it was not a great choice of paper to hold. Having said that, investors have now being shielded. So, it doesn’t matter for the investors, as and when the papers are serviced, the investors will be compensated. So, investors can probably stay on with this fund. As Amol rightly pointed out for risk-averse investors, banking, PSU, and debt fund categories are far better to be in.

Vishal: As you rightly mentioned, the divergence in returns across large caps and small caps have been quite large over the last three years. In fact, I think as a category small cap has given only probably 5 percent or 5.5 percent kind of return in the last three years, which is probably even lower than the liquid fund returns, so to speak. So, there is an opportunity in this space, the sector and the market cap have not done so well. The points in this market cap have not done so well. So, investors can probably stick to some old names like the DSP Smallcap Fund, which has been around for some time. Probably, it has seen a couple of market cycles. So, I think investors can probably stick to it and hope for better returns.

Amol: I would like to propose a different scheme: ICICI Prudential Smallcap. Many of the small-cap schemes today have a size of Rs 6,000-8,000 crore, even Rs 7,000-8,000 crore. ICICI Prudential Smallcap is a repositioned scheme so this is not a small-cap scheme, to begin with, but when the scheme recategorisation exercise happened, one-and-a-half-two years back, from that point in time this is a very small scheme. So, you are probably able to get exposure at a smaller AUM level where the ability to manoeuvre is better. So, we all understand the impact cost that plays when a fund manager has to buy stock on a much higher AUM size. So, the impact cost is likely to be better—the fund house is very much bullish and it has a performance to back it up. This has a number one, number two scheme with a one-year return. I’m saying returns only to the extent to say not to choose the fund based on returns, but only to say that their small-cap turnaround bets seem to be going in the right direction. So, you can look at this fund as well.

Amol: For a retail investor, it doesn’t change life at all because the regulation is for the intermediaries.

Amol: If you are using somebody who is a distributor for the needs of your investments, first and foremost, other than registered investment advisers in the Indian context, other than SEBI regulated products, nobody can give you investment advice. There is one exception though, which is that mutual fund distributors can give you only the incidental advice.

Now although you have said that it is being sealed with the meeting or minutes of the meeting having declared some time back, I would still wait to see the circular. If the incidental bit remains, I wish I must say that it should remain because there are many ways in which the distributors do service the industry. The most important, the easiest of them should be if somebody has a Rs 1,000 SIP, the annual throughput of that person is Rs 12,000-24,000.

Now, what fees is the right fees to charge to that person which will be less than the brokerage amount of that person? I’m saying that again we have had some programs on that when the previous consultation paper came but I would say that distributor as an entity it certainly there today and the incidental advice bit is likely to remain. The only difference is what a distributor can call himself. I would wait for the SEBI circular to see what sort of boxing the regulator intends to do.

Vishal: So, I think what SEBI has probably thought is that we should have two categories. One is the RIAs, they are called registered investment advisers, who can give advice on a variety of products, including mutual funds. The other category is the IFAs or mutual fund distributors, so to speak. So, these are the minutes of the meeting and will wait for the detailed circular to come. Amol said that and makes a very valid point about how do you service the base level investor and who is the base level investor, considering a mutual fund, probably just 3 percent of the population is investing in mutual funds and SEBI themselves have said that they want to increase the penetration. So, if you’re charging fees to base level investors, it may probably backfire to some extent in terms of penetration of mutual funds. So, the role of the distributor will continue to remain in this industry. Now, we will wait for the detailed circular to come to see the nomenclature the distributor is to use for himself. So, that we will wait and see how things pan out.