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The Mutual Fund Show: What’s A Good Bet In Volatile Markets

What’s a good mutual fund bet in volatile markets...

<div class="paragraphs"><p>A man gives the thumbs-up from a car. (Photographer: Karel Navarro/Bloomberg)</p></div>
A man gives the thumbs-up from a car. (Photographer: Karel Navarro/Bloomberg)

Volatile markets can make investors wonder whether to swap mid- and small-cap funds with the relatively safer large and multi caps. Financial advisers have also started recommending companies that are expected expand capacity in anticipation of a rise in demand.

Will it make sense for mutual fund investors to consider infrastructure and capex-thematic schemes?

Flexi-cap or diversified funds are better bets compared to infrastructure and capex-related funds as sectoral funds can be erratic in terms of returns, according to Swarup Mohanty, chief executive officer at Mirae Asset Investment Managers; and Mrin Agarwal, financial educator and founder of Finsafe India.

EV Funds

Three mutual funds recently filed applications for electric vehicle funds with the market regulator: Navi Electric Vehicles and Driving Technology Fund of Fund, Mirae Asset Electric & Autonomous Vehicles ETFs Fund of Fund, and Nippon India S&P EV Index Fund.

Mohanty and Agarwal are optimistic.

Increasing interest from consumers around the world, large global players focusing on EV and the growth opportunity in related businesses such as battery, semiconductor and components make it attractive, Agarwal said on BloombergQuint’s weekly special series The Mutual Fund Show. “But it’s a high-risk, high-return theme.”

She advised that investors must understand the holding diversification by industry, geography and the costs and risks involved (as policies may change) before investing.

Mohanty, however, is a lot more sanguine. He expects more consumers to opt for EVs. The pickup would only ensure more gains for the correct players and correct funds, he said.

Infrastructure And Capex-Related Thematic Funds

Both Agarwal and Mohanty said these funds should be looked at very carefully, and that flexi-cap or diversified funds might be a better bet.

Sector and thematic funds, according to Agarwal, tend to be cyclical and the theme may or may not play out in the long term. The returns from these funds also tend to be erratic and, hence, it’s better to leave them alone.

Mohanty said Mirae advises investors to allocate a lower portion of their portfolio towards sectoral funds. For infrastructure funds, he said the macro setup looks positive with continued capex as well as expected revival in the private capex. Historically, the infrastructure sector has been seen to be a deep cyclical sector and such bets can make investors wait for a long time before making decent returns, he said.

Mid, Small Caps Vs Large, Multi Caps

While there could be a mean reversion in small and mid caps at a headline level, strong companies would continue to do better, Mohanty said. “If investors wants to play doubly safe, they can keep higher allocation towards large cap and hybrid category funds and have a relatively higher investment time horizon for mid cap and sectoral funds.”

He, however, advises investors to not time the market and invest in a disciplined way in equities for the long term within earmarked asset allocation based on risk profile.

Watch the full interview here:

Edited excerpts of the conversation

Swarup, you guys, have funds across the bucket. Large cap, small flexi-cap, without sounding biased towards one or the other. And I know you won't. I'm just wondering just looking at the environment. Do you reckon for a retail investor who doesn't follow the markets very actively is a passive investor looking at the times, is it better to do this swap or is it wrong to time the market and try to find and do this swaps between mid cap, large cap, small cap?

SWARUP MOHANTY: Actually, as Mrin, is also on the show and you know, it's better to get her perspective, as well. It will be very interesting to hear her side. But, from an investment perspective, the basic way of looking at it is to follow your goal and the respective asset allocation from that perspective. As you form your core and satellite part of your portfolio. The satellite part is aimed at giving you that kicker, because the core is becoming more stable and if we look at return projection from the core portfolio, over the years, as the market sort of becomes more efficient, the returns come down and hence the need for rejigging your satellite portfolio or becoming more active, on the satellite portfolios. What is the need of the hour; where it is easier said than done. Because, the choices are a lot sometimes you know, the romantic side of these choices, take precedence over the actual needs. So to choose that is critical and somewhere when you start off at the basic point is the mid-small, which is the starting point.

Now, when you look at these two segments, especially for long-term investors, It is known that the returns from these two segments are lumpy in nature. There are long periods of lull and then they come suddenly and that's it just come, that is the easy money is outside the table. What will happen now is purely a balance sheet, growth rated, sort of realistic return. Now, the person who had invested prior to that has got his return. Now, if you're going to exit now thinking that the returns are not there in the future that is also fundamentally flawed. If you are located or over allocated to mid- caps, your fresh flows can go into the safer side. But, I am not a big fan of exiting any part and trying to time the market. You can rebalance it in other ways, in your fresh and close. Because there is a reason a certain category behaves in a certain way. And then the better part is to understand that a certain category like a mid cap and small cap the returns will be lumpy. And the patient investor only makes money in these two categories. So, in the rebalance side on fresh inflows one may not add as per the asset allocation grid. But to get out, I would be wary of getting out, that means you are saying that the return is completely over, which is not exactly true.

So, it's different for different people, I can understand so, but for Swarup Mohanty, what is that percentage allocation or over allocation and under allocation?

SWARUP MOHANTY: Yeah, so Niraj, this is a good question because I'd like to reflect a little bit on the question from the stage of my life. See, I'm now 51 years old. So, there is a retirement kitty, which is on my mind and I'm preparing for my retirement. So, in that phase, the return projection of my portfolio and say, that rigid return projection is, between 10 and 11% on the equity side, so because I'm in an accumulation phase, I don't do the return projection. I don't take a small-cap exposure that does not make me a better investor or an inferior investor. It's just sticking to my plan. I am, very convinced mid-cap investor, over a period of time. Yes, what is happening is you want us to be a little selective of the people who rely on the mid-cap category that is becoming the choice, if one is prudent on that choice. There it is. Now, it is a cliched statement that it is a stock pickers market. But from here on a good mid-cap stock picker can differentiate a lot in the portfolios, even from here so I'm not budging. I'm staying where it is but I do a very ruthless review and rebalance on a yearly basis. On that day. If I'm over allocated then my fresh money will go into the other side. I will not get out of my guess.

Okay, Mrin, I know one size doesn't fit all but can I ask you a follow up and then I'll come to the main question. Is there a benchmark level of under allocation and over allocation to mid cap, small cap, large caps?

MRIN AGARWAL: Well, I think, you know, each person can define that level on their own. But if you were to ask me, I would say, maybe if you get over allocated by 15 to 20%, that's when you need to look at doing the rebalancing and that to only once in a year I mean, obviously there could be many times in the year if markets continue to remain bullish that you might have this over allocation, but I would say again, look at it very, very subjectively. And I mean, objectively, I'm sorry. And really see, you know, whether the over allocation is causing a lot of skewness, because see, there are two parts to it. Certainly you need to be in it for the long term. At the same time, it does make sense to rebalance. But the type of, you know, the type of fund that you've chosen is also really important. So the difference between the best and the worst performing fund is going to be about 6-8% per annum and which is why, you know, it's not only exiting from a rebalancing, certainly not exiting from a timing perspective. From a rebalancing perspective, yes, but also depends on the quality of fund that you have actually chosen. And is it really helping you diversify your overall portfolio or not?

Sure. You don't use the other bit and the follow up that I want to ask Mrin is this right because when you look at the annual returns in good years, mid-cap funds tend to outperform both large-caps and flexi-caps by a huge margin. And bad years, they may be giving negative returns where in the large-cap funds might give positive, mildly positive returns as well. Mrin, do you advocate this swapping or is it also your line of thought also like groups, that do the allocation if you are over allocated and rebalance? And that's about it?

MRIN AGARWAL: Yes, that's the way I would do it. I would certainly not keep doing the swapping because every year there's going to be a change between large cap and mid cap and the whole idea is to really remain invested for the long term, but rebalance as and when required.

Okay, so viewers, I know a lot of you might have these questions you might hear on multiple news channels, maybe in conversations that I do as well that are mid caps and small caps might underperform large caps might do better. But, if you're a mutual fund investor, slightly for the long term they both are experts, seem to say that, don't try and time it that way. Maybe just adjust the allocation percentages that you may have been given if your comfort allocation is X percentage, and if you're 15-20% over, then you may need to reallocate for sure, Swarup does it every year. You can choose to do that as well. Let's move to the next question. And Swarup, I'll start with you on this simply because you seem to be one of those which is fine or the houses which are fine the product in this category. EV is sexy, everybody wants a piece of that, the physical product, as well as a financial product related to that. What have you done and what is the kind of you know, what kind of investors should be trying to do this? I'm sure your answer is a yes, because you've launched this with a reason that you believe that people should have an EV related theme in the basket, but give us some rationale around this, what kind of people should choose this?

SWARUP MOHANTY: So finally you launch a product where you see yourself like perpetually and in the EV, or the robotics or AI Kind of trends aren’t just trends. These are global mega trends which are being identified and have been already invested, in the mature markets. And please let's look at what's happening to India. Suddenly the demography of India is playing out in the investment behaviour as we speak. We need to look at the last two years, the investing public that is coming into the market, there is the present market and there is the incremental market, the incremental market no doubt is getting younger and make no mistake, this younger investor is economically far superior to the investor of the yesteryear, say me versus my son due to whatever economic growth that every family has gone through. So their risk-taking ability and their way of looking at investing may not have may not have any correlation with the previous generations. Investing habit is his thing which is dawning on to me, very quickly. And as an asset manufacturer, our job is, to put products on the table not to the influencing part or where to invest lies with the distributor advisor / any DIY investor, who has the acumen to do so, when you look at the future and future is not about first you started with a typical large cap mid cap, small cap sort of trend, and then it went into some kind of sectors or themes.

The future is to look at the West, is now to catch very, very pertinent mega trends, disruptive technologies. And you see what is happening in that segment today. Our car manufacturer sells 1,000 cars because he is able to manufacture only 1,000 cars. And it's a matter of time that the green number plate will be put up with a lot of pride and there is a lot of merit in owning that. Right, and that will only reflect in the investing habit in the next five to ten years. So, a person should look at it as a tactical investment, slightly futuristic in nature, yes, no doubt that this will unfold in a realistic manner and where it has either a tactical allocation to it or comes with a target return in mind. That is the way one should approach such products. This is not core portfolio at all. This is nearly tested as you know for sure the future is there in these kind of areas. But be very clear of how much you will allocate. Be very clear of how much you should not allocate to such products. The risks of these underlying products are yet to be time tested. And especially the volatility of these products because these tend to be global markets a little different from that of the Indian markets. So be very clear of the part of your financial plan that one must look at and stick to that allocation. And in the year if your target return is met I would be a person who would get out of that and or stick to the allocation that are catered to but the future lies in such products we saw very little part of it unfolding in the fang plus which is continuing to do well and we following it up with the EV we have some more plans coming in the future and it is to cater to the new-age Indian investor and of course taking nothing away from the existing investors, at all. These are ideas which are here to last, and will be sustainable over the next two three decades.

Mrin, the curious part about any such product is that it is great for everybody. And yet at the same time, no product is good for everybody. We see that classic conundrum in something like this. So therefore my question to you and please don't mind if we have an answer, which is saying that don't invest because we want an honest answer from you. What kind of investor should go for a product like this? Because it’s as I think as Swarup said, or I said I don't know? It is probably something that almost everybody would want at some point of time, in the very near future?

MRIN AGARWAL: When certainly it is a high risk theme at this point in time. I mean, certainly it does have its merits, of course, given that there's a lot of increasing demand. From consumers around the world. Or you have large global players who are focusing on EVs. And it's not just the electric vehicle it is associated industries like semiconductors, components and all of that which are looking good, of course for the next decade or two. But I think the investor needs to be very, very clear that this is going to be a high risk investment and as Swarup mentioned, it is a tactical allocation. And you need to be aware that this is going to be a concentration towards a particular theme. So again, and this is an international investment, so now there are different funds that are coming, right, I mean there are three or four funds as we speak that have filed for this particular theme. So certainly I think investors need to be aware this is high risk, because any theme tends to be concentrated, it may or may not play out that risk is there so they need to be ready for that volatility.

And the other thing that I would say is that please check. You know, just don't go blindly in for it just because it's an EV theme. I mean, look at what are the geographies that have been spread out? Each of the funds that are coming are going to have a different focus, like some of them might just be focusing on EV manufacture some of them might be focusing on businesses around the EV so do you know read up on that bit, check the geographical spread as well. Of course, costs are very important, and keep in mind the risks because policies on these are ever changing. Right now, you're seeing good policies coming into place but of course you'll have to keep a check on some of those things as well.

When do you stress upon that cost?

MRIN AGARWAL: Because each fund is going to be set up differently some of them are being set up as ETFs some of them are being or are investing in funds in other funds that are already there. So they are being set up as fund of funds so there might be some cost differentiation between each of these funds. So, it will be good for investors to keep a check on what the costs are.

Are there any existing products already, that you may have recommended to your clients as well or not as yet?

MRIN AGARWAL: No, no, I don't think so. Not yet.

Let me start with you, Mrin, on the third piece and after that Swarup, about the third angle as well. I'll come back to you with maybe some recommendations if you have, but the primer question everybody seems to believe that the India capex story might be taking off. Would you recommend investors to, in the satellite portfolio, if not the core, take some exposure to infrastructure and capex-related themes thematic funds?

MRIN AGARWAL: No, I wouldn't actually because as it again, this is a specific sector. We have seen that there have been years where the sector has performed followed by two or three years of underperformance. And I really strongly believe that if there is a high conviction stock sector. A fund manager in any case is going to have allocation to this particular sector through some stocks in the more diversified portfolio.

So instead of taking a concentrated exposure into an infrastructure sector, I would say that just play it out through a diversified fund, maybe a flexi-cap fund. Certainly not take a bet on the sector funds and of course, the standard deviation, the volatility in returns is very high in sector funds as compared to diversified funds. So I would not actually recommend taking a direct exposure into the sector fund, I would say, just invest in flexi cap, because I'm sure that they will have some stocks in this particular sector, as well.

Viewers, we have to admit I got the data from Mirin and since 2013, when you compare infrastructure funds versus flexi cap versus large cap, nine years, give or take a month, but nine years, they have had a bout of outperformance only thrice. So, and in any one of those instances, our performance is not also very, very large. So maybe there’s merit but so everybody seems to believe that we're, you know, we in the last decade we didn't quite see infrastructure really have the kind of run that it had in 2003 to 2008. And if it does this time around, then this could be a multi-year story and the returns could be very different from what they have looked in the last decade or what would your assessment be?

SWARUP MOHANTY: Very interesting topic, whenever we discuss infrastructure because theoretically, if you look at the country, and then you look at the future of the country, I would break it into four broad themes. One is banking, healthcare, consumption and infrastructure. When you look at the other three themes, they seem to be following some logic, but the infra theme has led more than often than not flattered to deceive and that is where I completely agree with Mrin, that you know, played through the diversified portfolios because storytelling perspective it is a phenomenal story to say, if India infra does not happen, India does not happen, as simple as that.

But if the fund manager is convinced on a particular stock, he or she will play it through their diversified portfolios. And because if you look at an I'm looking at it from the late 90s, I will say 2000 is when the infrastructure started, when we'll remember, those days, we've had a plethora of infrastructure funds in the industry also and a lot of folks were pinned on this. And if you look at the track record, the track record will say consumption, healthcare and banking I put on the table have not been put by infra, hence I will also agree completely with Mrin, that played through the diversified space. The fund managers will play conviction bets there.

I take it Swarup that your house does not have an infrastructure fund?

SWARUP MOHANTY: No plans to because we’re big thematic players globally. And if you look at us on the passive side also, we are known to be thematic players but in India we run the other three things, our blatant house call is the banking team at this moment of time for the next three four year perspective. We gave out a blatant healthcare call three years ago, our consumption fund is eight years, as we speak, but we refrain from even discussing an infra theme, as a product in the market. I'll just leave a rejoinder here, just wait, we have some very interesting parts of the capex side. We'll come back to you, probably in two months and Capex would be more manufacturing learn that just infrastructure.

So, it'd be interesting to see that product. So because I mean, it seems, from the commentary that have come in and us I would urge you to, I mean, shameless plug here, but it's not a plug really, I would urge you to hear an interaction that we did with the management of SKF India and the kind of thoughts that they have put out, in terms of the order inflows that are coming in and the kind of industries that are giving them the orders in the first place. It seems very, very interesting to look at that manufacturing aspect of, of the Capex side that Swarup was talking about when have you looked at infrastructure Capex on already? I know your recommendation is a no. Have you by any chance for somebody who's a risk taker ever recommended any of these funds that might be existing?

MRIN AGARWAL: No, I've never recommended them. Yeah, they started in 2005. And I've never recommended these funds to anybody and for that matter, I have actually never recommended any sector funds.

Okay, well, viewers, that's interesting. So, it's a no on these as well. That seems to be a bit of a consensus between both our guests, almost all the topics. Let's see if the final one also lends itself to that man. Mrin, I'll start with you. Across my team of corporate bond funds, I reckon I mean, I could be a bit wrong here and there but circa five and a half percent, but is it prudent for somebody to take exposure to corporate bond funds or are there better options available, on that side of the market?

MRIN AGARWAL: Well, actually, forever I have been on the debt side, I have always recommended either the short duration fund and if you're actually very conservative, if you want a AAA portfolio and don't want too much volatility then the corporate bond fund is okay. But when I look at it in terms of standard deviation, again, you'll find and risk adjusted returns of course, you find that short duration funds work out slightly better and I also liked short duration funds, you know, for the reason that they actually have a lower modified duration and with interest rates moving up, that would work in their favour.( I can tell why a lot of viewers might be interested in knowing why.) I think that's just the way the funds are set up right, as for the SEBI definition in terms of the duration that they're allowed to take. And again, the other thing with short duration funds that I like is that they're allowed to take some amount of decent exposure.

So while that may or may not work, you know, in the rising interest rate scenario, it may not work but I think it gives you a good blend, you know, like I would actually say that your short duration fund is like your taxicab an equity you know, it gives you a good blend of corporate bonds and government securities, it is lower modified duration. And you know, when you look at it over longer periods of time, the risk adjusted returns have also worked out ,much better than most of the other categories. So, I think the corporate bond fund is okay. But as an alternative, I have always actually advised on the short duration debt funds and I found them to be consistently better performing than most of the other categories. When you look at very long terms.

Okay. Swarup, what are your thoughts here?

SWARUP MOHANTY: For me, let's before coming to that I have a small observation about the way that the same investor approaches equity investing and debt investing, while on the equity side and programs the same investor and the person is very clear that you know, I will allocate so much to the large-cap, mid-cap and small-cap part when you talk about asset allocation or attempt to catch the length of the market breadth of the market is completely non-existent on the debt side. The reason you come to a fund manager on the debt side, is to help you play either the interest rate cycle or the credit cycle and then each fund on the equity side comes with a minimum horizon.

And the sad part of India is from a taxation perspective, we say long term is debt and short term is equity. So, from a three year horizon which is the starting point of any investing, post tax return possible on the debt side, the three possible products that are there are either the dynamic bond fund or the corporate bond fund or are set the bank and PSU fund. So, if your horizons are above four-five years and interest rates are cyclical in nature, then give it there if your money is shorter than that, then I will go blindly with what Mrin is saying, but are we dividing the money as per the longevity of our monies like we do on the equity side is a question which I always raise.

If your money is for the longer horizon and you feel you have the appetite to take on the guilt score for the gates, if you have the risk appetite for a credit in your portfolio, but there is a merit to every product. Now you can generalize the entire category based on the behaviour of one or two products. That's not fair. So there is a reason for a corporate bond fund and there is a reason for a bank PSU fund. I'm a big advocate of both of these two. And if your horizon is about three to four years late, select a good guy who can manage your money in that category. And then if you want to keep it a blanket then I'll go with what Mrin is saying because there is a lot of merit to what she's saying at this moment. But do we approach debt investing the way we approach equity investing if interest rates were too hard any year? Are we going to put more money in debt is a question I leave behind to everybody. At that point of time we run scared, which is the time to put give money to a long funded fund manager is fine, is my view,

An equity fund manager would say that we are approaching equity investing the way we do that, because in that investing in the markets, all we run towards that whereas in the height should be the other way around calling god by that stage completely.

SWARUP MOHANTY: Today funds that are the you know, changing you know maturity of I will first give the advisors and the distributors that credit and then of course the investors, they are standing tall. And again in that if you cut it out, the SIP investor and the lumpsum investor are completely different. Yeah, it's like the investor has the same guy on his side. They are sitting tall in the market and the lumpsum side a lot can be said.

Actually, it's been heartening. So for the longest time I used to think that why is it that you know the premier Indian institutions are owned by foreign investors, the SIP book. The constancy and optic out there is so heartening because India's some of the best and which is why we are an institutional investor. Time to thank to the SIP. Yeah. Well, well said I mean, just wondering it on the category that you mentioned, which people should look at or even on the other side. Are there some funds that are some houses which are doing this job consistently better than others? Would you be able to share some names to be lovely for our investors to have an idea or to our viewers, sorry, not investors to have an idea of?

MRIN AGARWAL: Well, I like the ICICI short term fund, I like SBI short-term funds. Again, on the corporate bond side, I do like the corporate bond fund as well. So, these are a couple of names that I like.