The Mutual Fund Show: Why These Advisers Think Now Is As Good A Time As Any To Invest
Are equity mutual funds a good bet amid current volatility? Find out here...
India’s equity indices have tumbled more than 35 percent from their peak in January, tracking the worst selloff in global peers since 2008 crisis, as the new coronavirus pandemic threatened to push the world into a recession. But mutual fund advisers suggest it’s a good time to start investing.
“On a one-year rolling return basis, the Nifty has delivered positive returns 70 percent of the times since Jan. 1, 1991. If you extend this period to three years then you’ll find that the Nifty has delivered positive returns 89 percent of the time, implying that the odds of making money on your investment improve as your investment horizon widens,” said Vijai Mantri, chief investment strategist, founder promoter and chief mentor at JRL Money.
“If anybody has a vision of investing perhaps for the next three to five years and they have at least one year’s cash to meet their contingency requirement, I think this is a very good time to start allocating money into equities,” he said in BloombergQuint’s special weekly series The Mutual Fund Show.
According to Sunil Jhaveri, founder and chairman at MSJ MisterBond Pvt Ltd., the recent rout has also brought down the valuations for the front-line companies, making it a case for investing into equity mutual fund schemes. “Valuations were extremely expensive from July 2017 onwards. However, post this sharp correction, we are shifting from our earlier conservative strategy and investing 80 percent into equities as we see market conditions are extremely favourable.”
“If you have invested at a reasonable valuation or achieved a valuation, which is the current scenario, then yes, you will make money. A lot of market parameters are in favour of investing. So, from now to the next three years to five years, people should make decent returns for investments made during this period,” Jhaveri said. “But for that, investors need to have cash. I don’t know how many have cash and how many are bleeding. Also, you need to have the guts to invest now.”
Watch the full show here:
Here are the edited excerpts from the interview:
Vijay, do you reckon that this volatility might be here to stay, but that might actually give you a reason to invest into mutual funds currently, why or why not?
VIJAY MANTRI: The volatility has always been and will remain a part of equity investing. This is not the first time and this is not going to be the last time. We have seen historically, in 1992, we have seen in the year 2000, we have also seen in the year 2008 where equity come came down as low as more than 50 percent. So, your Rs 10 lakh investment came down to less than Rs 5 lakh and it happened three times. So, this is nothing new and it is not going to be the first time.
One of the worst ways to invest but most people do is to look at immediate past returns. If the immediate past returns are very good in any asset category, then people tend to invest in that that asset category; be it real estate, be it debt, gold, or equities. Perhaps the worst time to invest is when returns are very good and the best time to invest in returns are, are sub-optimal or in negative territory. So purely from that perspective, because we believe that there’s one law in finance: reversal to the mean. This tells us that anything which goes down continuously has to come up.
So, this is purely from a philosophical perspective. But equally important is from the perspective of data. What moves the market? This gets reflected in various ratios that people track, whether is a P/E multiple or price to book value, or dividend yield or yield gap or a market-cap to GDP. From all these perspectives, the market is actually in “buy” zone. So, if anybody has a vision of investing perhaps for next three to five years and they have at least one year’s cash to meet their contingency requirement, I think this is a very good time to start allocating money into equities over a three-to-six-month period.
Sunil, what’s your sense the last time that we spoke, you were in the balanced advantage fund category? Are you reversing that call now? Are you switching to equities? Why or why not?
SUNIL JHAVERI: So as we discussed in July and November 2019 in both the shows; that we need to move away from the old mantra of, ‘Buy and Hold and SIP karo bhul jao’ and do not time the markets, that has come to haunt us or it’s being proven right currently. What I have been advocating is being with the right asset class at the right valuation.
Valuations were extremely expensive from July 2017 when we give an exit call, and we were sitting with a “Balance Advantage Fund” category from then to as late as March 23, 2020, which was the day before yesterday, when markets collapsed by 4,000 points. That was the first time in the last three years when the green zone has been achieved.
But mind you, the market is that 17 P/E. So, the question which people have on their minds is can the markets correct further from here on? The answer is clearly yes, it can correct from here on also. So, if you have the history with you 2008 -09, the market P/E had corrected to as low as 10.5 or 11. That means there is some gap still possible. Having said that, is this the time to stay away from the market? The answer is clearly no. My algorithm says 80 percent in equity which means that you must start shifting from dynamic asset allocation funds back to the equity fund on a regular basis and markets will give you time from now to maybe next 15 days, 20 days, 30 days during this lockdown period. With what’s happening in the U.S. or in the Indian context on the Covid-19 issues etc., they will have opportunities to invest on a daily basis. So, yes, my call has now been to start switching from Balance Advantage Fund back to equity, slowly and steadily.
Just one reference point, when markets corrected in January 2008 from 21,000 Sensex to 13,000 Sensex in July 2008, that was the yellow zone with 70 percent of the equity as per our algorithm. Did the investors who invested at 13,000 make money? Yes, they also made money because the market valuation was reasonable. So, the conclusion here is that we cannot, you know, find the rock bottom and then wait for us to invest because markets will not give you time to re-enter if you stay away. But if you have invested at a reasonable valuation or achieved a valuation, which is the current scenario, then yes, you will make money. Based on what Vijay said a lot of market parameters are in favour of investing. So, from now to the next three years to five years, people should make decent returns for investments made during this period. But for that, investors need to have cash. I don’t know how many have cash and how many are bleeding. The second thing is that you need to have the guts to invest now.
With the presumption that people have cash or the salaries coming in and out of the money that is left after spending on the essentials (because these are trying times) can you invest in equities? And if so, where to invest? Now before we discuss where to invest, gentlemen, this is what we’ll do. Vijay, I will first come to you. There are some data points that you’ve given us, Nifty returns under normal circumstances and how they vary. Of course, when the yield gap fell to 16 percent, I think that’s the comparison that you are drawing out, what happens to returns as well. Can you tell us the importance of these data points? Then, of course, we will come to where within this large equity landscape, do you gentlemen recommend people should go to? Vijay, let’s start off with you first on these comparative points that you’ve mentioned.
VIJAY MANTRI: I have been tracking the market for almost 25 years and we have tracked basically five data metrics: price to earnings, price to book value, yield gap, the earning of Nifty and the gap between Nifty earning and the G-Sec yield, and we looked at dividend yield, because no single data will give you conclusive evidence, but you have to read all these four data in conjunction.
So first, if you look at Nifty normally, in out of every one-year rolling return, Nifty has delivered positive returns around 70 percent of the time and 30 percent of the times Nifty has delivered negative returns over a one-year period, but you extend it to three-year period, Nifty gave negative returns 11 percent of the time and the remaining 89 percent of the times returns were positive. In the five-year-plus period, Nifty never delivered negative returns if you account for the dividend yield as well.
But today, we are in a situation where if we just go by the dividend yield gap story, then currently, dividend yields are in our opinion, again at a historical low. So, from these levels, the probability of loss in a one-year period has come down from 30 percent to 0.4 percent. In a three-year period, the probability of loss has come down from 11 percent to 0.1 percent and in the negative return range, the one-year negative worst return Nifty has delivered is 57 percent. That return actually comes down to 2.5 percent only. In a three-year period, the 16 percent negative return comes down to 0.6 percent. These are Nifty returns without taking into account adding the dividend yield. Suppose you had a dividend yield, so one to three years from now, the probability of loss and the quantum of loss is very minimal. So, in my opinion, the odds of making money in equity currently is in the favour of investors. But how many investors have liquidity and how many investors have the courage to invest is a big question mark.
I think even if people have liquidity, do they have the courage to invest? Because I think the most common question that comes into minds of everybody is that what if it were to correct more and I reckon that that should be done away with maybe.
Vijay, just a follow up there, therefore if that is indeed the thesis that data supports, that maybe there could be some upsides based on various data parameters, what should people do? I mean, there are so there’s a category of people who have already invested for the last two, three years or maybe longer, should they continue with the current investments? Should they prefer large-caps over mid-cap funds because large-caps typically tend to rally the first or should they continue with the mid-cap funds as well because there are a plethora of mid-cap funds that got launched and people invested in them in the last six to nine odd months.
VIJAY MANTRI: So, again, it has come to where one needs to invest. I think multi-cap and mid-cap could be good areas to invest, but just to be a very fast answer. More importantly, invest as invested, for instance, in the mid-cap fund, which was launched in the last couple of years, and most of them are actually are in the negative territory. Just go back to the year 2000 or 2008. At that time, many funds were launched and the NAV of the funds had come down.
I remember in 2000, many information technology funds got launched and the NAV has fallen as high as 80 percent. But most of these funds recovered the NAV when the market recovered and over a period of time, made money for the investor. So, I’ve been tracking mutual funds for 25 years, equity mutual fund has never lost money for the investor if the investor has not taken money out at the wrong time because eventually, the market recovered and the funds NAV recovered. So, my suggestion to the investor who has invested and seen 20 percent, 30 percent, 35 percent perhaps losses in the portfolio to stay.
“I know it is people may say that it is our hard-earned money, it is not your hard-earned money,” but we have seen the market, it is your hard-earned money and perhaps you have seen 80-90 percent of the worst-case scenarios. From here onward, maybe 5 percent, maybe 10 percent more pain you have to tolerate, but the market will reward eventually and the investors are going to make very good money from these levels. So, the probability of losses in my opinion, from these levels is very low. So, talk to your financial adviser because these are the times when the investor needs to continuously talk to the financial adviser. During the coronavirus, you need to continuously consult the medical professionals. Suppose you have any challenges similarly in the given situation, investors need to communicate regularly with their financial advisers, take the assessment of the portfolio and make the right call that perhaps is, in my opinion, the right prescription in the given situation.
Now Sunil, whether for your sets of investors who may have gotten out when you told them to get out and are now looking to get back in, there is data to support this theory, right? From among the things that you sent us—the kind of returns for the corrections and the rallies since 2000 give ample evidence that these corrections when bought into, have actually ended up giving spectacular returns.
SUNIL JHAVERI:: Absolutely. So I’ve given you two or three data points. One was that last week’s markets corrected by almost 17 percent within a week and before the jump on March 20. So in the last 20 years, which is 1,040 weeks, markets have corrected by more than 10 percent only in seven calendar weeks. Now, that was one of the points which I had shared with you saying that this kind of connection is the one where you need to buy into the markets. The other data point which even Vijay has not touched upon is the P/E and P/B of the markets. In January 2018, it was 27.5 P/E and 3.73 P/B. Currently, we are at 17 P/E and 2.17 P/B and the market-cap to GDP ratio again has come to favour the investors so well, which is almost as close to what happened during the financial crisis time in 2008-09.
So currently, your market-cap to GDP ratio should be somewhere close to 54 percent. The other ones whenever the markets have corrected and there were major corrections from 2000 to 2020, there were quite a few of these corrections of 10, 25-30, 40 and 50 percent kinds of corrections. The average bounce backs have been almost 52 percent one year later and almost 87 percent two years later in terms of the returns for investors who invested during these correct correction times. So, as rightly pointed out, this is not the time to exit at all, that’s totally out of the picture as an option for the investors who are still stuck. But if you have the possibility or capability of investing more than at the current junctures or even your own investments will bounce back to the extent of 52 to 87 percent, as what the markets have done in the past. So, if you come out at this juncture, you will lose out on the momentum, which will happen going forward.
Sunil, what kind of funds would you recommend currently? Now, I understand you recommending moving out of balance advantage, which is fine, but if people have the cash or if people have some cash, which they want to deploy into, should they use large-cap funds because that’s where the first port of call is, should they use multi-cap funds, should they use mid-cap and small-cap funds? Should they use something else?
SUNIL JHAVERI:: See, going forward the fund managers’ ability to create alpha in these segments is limited because now they are capped as far as the SEBI regulations are concerned. We discussed this during our shows earlier also, that I am an advocate of multi-cap funds rather than taking a call on mid-cap and small-cap yourself because you do not know when to exit. If you know when to exit out of mid-cap and small-cap, please get into. But I’m not an advocate or a proponent of that. Or else, get into a multi-cap space let the fund manager decide whether it should be skewed more towards large-cap more and mid-cap, etc. That should decide the journey for the investors on a much smoother scale. I would do large and mid-cap as a segment and multi-cap. So, these are the three segments which I would definitely recommend. Those who want to get a little more aggressive because of the market valuations at the current juncture, up to mid-cap is what I will do.
Vijay, with the current debt market situation and the non-equity funds, what do you make of it? What would your advice be to people who also want to park some bit of money into the non-equity funds?
VIJAY MANTRI: I think if you see in the month of March, FIIs sold lots of debt paper in India and because of that, the current yield on commercial paper, CDs, NCDs even PSUs and AAA bonds have spiked up quite significantly. So, investors may have seen negative returns on ultra-short-term and for a few days may be on the liquid funds, but compared to bank FDs, in my opinion, liquid funds for the next one month or two months will substantially outperform bank FDs. The same thing would apply to ultra-short-term funds. Even if you look at the PSU debt fund, currently the YTM, which was around 6.5 percent have gone up to 7.5-8 percent. In AAA bond, it is about 8 percent.
So, if anybody is looking at a three-plus investing horizon, then in my opinion, it will not be very difficult to look at 6.5-7 percent. So, it is a fantastic opportunity even on the fixed income side and Bloomberg wrote a very interesting article and I quote “even HDFC Ltd.’s commercial paper has shot up from 5.5 percent to 8 percent, Bajaj finance paper shot up from 5.5 percent to 7 percent, Aditya Birla Capital’s CPS has gone from 5.5 to 10 percent”. So, these are really mouth-watering yields and what will happen is lots of money is going to go into bank deposits so far as banks continue to go down the path of reducing deposit.
So, if anybody looks at investing, though today the comfort level of banks are very high because we are concerned about a well the world will remain there tomorrow not. But if you are looking at investing anything between 30 days and three to four to five years, today, the top-end debt fund provides a fantastic opportunity.
Sunil, what’s your view?
SUNIL JHAVERI:: These are the opportunities which if you remember; we had done one show called ‘Think Debt, Think Long Term.’ In that, I had mentioned that there will be spikes in the interest rate scenario from time to time. Those are the spikes that are opportunities for any investor to invest in. Will I recommend credit risk space currently?
I’m saying no because credit risk space at that time also, I have spoken against it and this time also, I’m saying the same thing that in this particular year, they will be more stings, delays, defaults and downgrade possibilities. But there are those AAA-rated, as Vijay rightly pointed out, PSU bond funds, which we had discussed in our on our show also when we said ‘think debt think long term’ has really shot through the roof. These are the opportunities that should be treated as an open-ended fixed maturity plan. So, what I meant by that was exactly the same situation what we are facing currently; when your yields have gone up from 6.5 to 7.5 or 8 percent of the AAA-rated bonds. Some of those schemes which we had discussed were the Edelweiss Bharat Bond Funds, Axis Dynamic Bond Fund- constantly rolling down maturity, Nippon Nimesh Lakshya which is on 25 years and constantly rolling down on G-Sec, etc. These are the opportunities for anybody to invest and forget that money. If you are following an asset allocation strategy, this particular segment of debt at the current levels should become your passive debt allocation.
Invest in these schemes, forget about it for the next five years, 10 years and do whatever you need to do on the equities based on valuation, you will be absolutely on track because you’re not taking any credit calls, you’re not having any liquidity issues with these kinds of bonds and schemes, and you have captured higher yields. So, what more can you ask for? Because going forward, I don’t foresee the yields to remain at these levels for longer periods of time, because for a country like India oil that is $20 dollars or below is a great opportunity in the debt market, current account deficit may be in the surplus zone, the inflation is under control and I’m sure RBI in sometime in the near future will be coming to cut rates and infuse liquidity. All these are positive factors as far as debt is concerned.
Sunil I just wanted to recap the funds that you mentioned there is a Nippon India Fund, there is an Axis Fund, because you know equity funds people find it a lot easier to invest into for debt funds, they get confused because there are multiple options there is liquid, there is short term, etc. What are the one or two options that you believe are good to invest in then people will, of course, make their own research and their own call, but just from your perspective?
SUNIL JHAVERI:: But this is for long term as I’m saying again, so that’s the caveat. So Axis Dynamic bond fund invests in AAA-rated corporate bond funds, and these are all constantly rolling down on maturity. Edelweiss and Bharat Bond Fund do something similar where they invest in AAA-rated PSU bonds. Edelweiss also has a PSU banking debt fund again a constantly rolling down with no credits. The Nippon Nimesh Lakshya is a 25-year-old G-Sec paper constantly rolling down and the other one which I would like to add into this segment is the ‘All Seasons Bond Fund” of ICICI Prudential because they have a CAD index and they do duration between one-year to 10 years based on the macro factors attached to the current account deficit.
So, these are the four of my favourites on a long-term basis. I will continue to repeat them from time to time as in when the opportunities arise, and we will talk about it because the yields have gone up currently. So, we are speaking about them again. These are long term debt funds. So, the intermittent volatility will be part and parcel of it. You will need to write that.
Vijay, last question to you, on the debt side, what is it that he would recommend, with caveats, of course that the viewers will do their own due diligence before investing?
VIJAY MANTRI: I think one has to look at the time horizon and at the maturity of the fund and then compare the YTM with the bank deposits, so if you do that, then you’ll be very fine. So, if you’re looking at 30 to 60 days of investment, liquid (funds) is a great time to invest. If you’re looking at 60 days to a six-month period, ultra-short-term is a great product. If you’re looking at a one-year plus, then you may look at low duration fund if you’re looking at three years plus then corporate bond funds are a fantastic idea to invest in the current market PSU. In my opinion, look at IDFC, look at SBI, look at HDFC, look at ICICI prudential, and look at Axis Mutual Funds. These fund houses have done a fantastic job in the current market conditions and most of their funds have done very well.