What Mutual Fund Investors Shouldn’t Settle For In Next Five Years
Investors shouldn’t settle for returns that offer 1-2 percent premium over nominal GDP growth, according to A Balasubramanian.
Mutual fund investors shouldn’t settle for returns that offer a small 1-2 percent premium over the nominal GDP growth in the next five years, according to industry veteran A Balasubramanian.
On BloombergQuint’s Mutual Fund Show this week, the chief executive officer of Aditya Birla Sun Life Asset Management Company suggested asset allocation strategies to maximise gains.
While he is not too worried about liquidity woes of debt mutual funds, Balasubramanian prefers equity over debt schemes in the near term. And he is betting on multi-, mid- and small-cap schemes even though the underlying indices are trading at a discount to the large-cap peers. That’s because Balasubramanian expects them to catch up given the bullish India story.
To know what a mutual fund investor’s return expectations should be in the next five years, watch the full interview.
Read the edited excerpts here...
I have seen a lot of advisers saying, go out and buy A-rated debt instrument funds because they’re giving very good yields and there’s little risk. But risk will not be so so low that it matches fixed deposit returns. According to some advisers, those plans are good plans. Do you agree?
I understand where you’re coming from. It’s all about asset allocation.
See, fixed income schemes come with different types of schemes. One is the purely liquid fund, which is like lazy investing—like a savings account. Then you have low and medium duration assets, where you don’t take credit risk but you take interest rate risk. Finally, there’s credit risk fund where you have an accrual.
When you look these four types of asset classes, then some portion of these assets—say 5-10 percent—can go into these kinds of funds, which having high OTM (One-Time Mandate). Those OTMs haven’t come because companies are offering high coupon. But those instruments got downgraded and therefore OTM went up. That’s where one can take risk—to some extent—on your portfolio.
Over the next five years, what do you think will do better—large-cap funds or multi-cap funds? Or do you believe small and midcap funds will play catch- up and therefore small and midcap funds could give higher beta? All can do well. But what will do best?
We have seen the charts of large cap versus midcap and midcap versus small cap. Sensex and Nifty are at an all-time high. The midcap and small caps are trading at 18 percent discount to all-time high, which means these companies have to come back in its performance.
We’re talking about five years of visibility for the Indian economy—in politics as well as economic growth. It can extend to a decade as well. I would even take a bet looking at 10 years of bull economy in multiple areas.
When you give such a long period for one to perform, so this underperformance has to catch up. A large pool of companies are coming up in the mid- and small-cap space. So, we will see earnings improvement when the business outlook improves. And interest costs coming down will also boost the bottomline.
Therefore, earnings optics will come for mid and small cap companies, as you move forward, faster than large cap companies. If someone is looking at a 5-10-year period, then definitely one can bet one investing in midcap, multi-cap and small cap funds.
What’s the strategy you’d suggest to mutual fund investors after elections? Is there a list of do’s and don’ts which people should keep in mind?
First and foremost, one should not try and time the market.
There is absolutely no doubt bullishness is returning, and the India story will come back. Foreign investors will probably pump in more money into India compared to the last 2-3 years. At the end of the day, they also need to have a better alternative to their own global investment strategy. Therefore, India will feature prominently in their investing concept.
That being the case, if somebody is trying to time the market and waits for the market to come down, then—in my view—one is making a mistake.
Indian investors have started investing rightly. Thanks to industry players propagating systematic investment plans, SIPs have become a habit for investors. They should continue doing that and put all their money into SIPs—short term or long term.
Invest continuously and don’t stop. When in one year the return doesn’t come on SIPs, people get worried as if the money is invested only for one year. If you are investing for 10 years, don’t look (at) how the investment has performed in one year.
Investors need to have conviction and continued to be focused on SIP investing—whether it is lumpsum investment, SIPs or FDs through STP. That’s the strategy one should continue.
They (investors) should continue to focus on asset allocation. Today, one asset class will do very well but tomorrow it won’t. So, there is no absolute guarantee that an asset class will do well thoughout its lifetime. They will go through some ups and downs. Therefore, make asset allocations between fixed income, equity and—to some extent—even gold. If you keep them as overall principal with high focus on asset allocation, I’m sure investors will make money out of mutual funds.
Do you do that too?
I do that too. But I’m overweight on equity. In the last one year, my portfolio didn’t do that well. But it’s fine, as you are investing for the long term.
Do you believe that in the bullish market cycle that you envisaged, the returns that Sensex or Nifty give will be good forCAGR for the last five years? Do you think Sensex CAGR returns—and thereby the index fund CAGR returns—will be higher than that? Is that a possibility?
In Sensex and Nifty, beyond a point, it’s unfair to expect big companies to grow at more than the nominal GDP growth. If you give them earnings of 11-12 percent or 13-14 percent, then it is unfair to expect that these companies will deliver returns to shareholders beyond that.
So returns expectation—which anybody should keep in mind—is nominal GDP growth plus premium.
Plus 1-2 percent. That’s it.
As you go down the ladder—from large cap to mid and small cap—naturally earnings growth will be higher. Therefore, one could expect more thanthe returns that large cap or Sensex, Nifty deliver. One can expect another 1-2 percent of it.
While we talk about India as the fastest growing major economy in the world, what is the number you are talking about?
If you’re able to sustain 7-7.5 percent GDP growth, aiming for 9-10 percent is too optimistic. We, as an economy, will be able to sustain 7-7.5 percent, with no ups and downs. We will be able to sustain return expectations over a period of time.
India has focused on keeping inflation low. That means we are talking about 7.5 percent GDP growth, inflation average of 3.5-4 percent. Thatcomes to about 11 percent. The earnings growth can be 2.5 percent more—only that much return expectation you can have.
We’re not factoring in the potential risk, which can come along the way. Along the way, you can see some kind of risk. If you capture that then we may see some fluctuations. But on average, one shouldn’t expect beyond this.
Anything that investors should keep in mind when they look to invest at these levels for the next five years...
Keep high focus on asset allocation. You shouldn’t restrict yourself to one asset class. Money should revolve in three or four assets classes, including fixed income and equity... In the last 25 years, we have seen accidents. These accidents get healed over six-to-eight-month period. So, every investor has to give time, have tolerance to go through volatility, and not change the course due to such eventsas it will damage their portfolio.
A lot of people have been stopping their SIPs. They mustn’t do that. That is the worst thing they can do. Having started a SIP, continue it rather than stopping it in between.
In the last declared numbers, amount invested in SIPs has gone up. Is it that while the new investors are coming in and existing investors are stopping their SIPs?
Some of the existing investors, I am seeing that trend in the last three months for the whole industry. Every month, about 18 lakh new investors came in and about 2 lakh subscriptions stopped. Today, that 18-lakh number has gone down, but the 2 lakh number has gone up. That means people came in with the hope to invest in mutual funds through SIPs but they suddenly stopped it. They should never make these mistakes.