The Mutual Fund Show: Long-Term Vision Crucial In Times Of Volatility
Investors looking to stay invested in equity during times of volatility should focus on their long-term vision.
Investors looking to stay invested in equity during times of volatility should focus on their long-term vision as tenure is more important than trying to play for the short-run, according to investment advisers.
Volatility and equity go hand-in-hand, said Juzer Gabajiwala, director, Ventura Securities Ltd., adding that even the low volatility funds would be classified as high risk according to SEBI categorisation. Volatility is what is going to make returns for you in the long run, he said.
For Kartik Jhaveri, director-investments, Transcend Capital (India) Pvt., everything is based on "financial goals, the situation of the person, what his long-term vision is, what his current circumstances are, and how he would like to plan life and future."
The best way to handle volatility is to expand systematic transfer plan duration, Jhaveri suggests.
"Now what we tend to do a lot of times, is when we invest in mutual funds, we tell people markets will be volatile. So, we'll divide the money into 12 parts, and we will enter the equity markets into 12 zones and divide it further by a week and in 52 steps you are entering the market," he said.
Jhaveri also recommends having some cash on hand. "It's always a good idea to have about 20-30% cash... every time you see broad indices down by 2-3%... these are days in which you should probably buy. These are days when you, if you have liquidity, buy that mutual fund. These are days to do that lump sum kind of a purchase also if you want."
Watch the full video here:
Edited excerpts from the interview:
Juzer, in the last five weeks, the indices, at least the headline indices have been in a bit of a consolidation mode. So, mutual fund investors would be thinking whether it is a good time to actually take exposure to low volatility funds. If indeed, the predictions that the year might be getting really choppy, what is the advice that you are giving to such questions at your outfit, to mutual fund investors?
Juzer Gabajiwala: I think mutual funds will keep on creating new products, just to create some appetite and buzz. So, you have to be very careful, volatility and equity go hand in hand.
So, if somebody is not going to be looking at volatility, you have to think about whether you would actually want to be in equity as an asset class. The more important question is actually going to be what the risk appetite will be.
So, even the low volatility will also be classified as high risk as per the SEBI categorisation because they will still come under the equity category. So, my personal belief is that, if a client is actually looking at equity and then if he is talking about volatility, it is better to avoid that as an asset class and rather be in another asset class.
In equity, you have to embrace volatility. Volatility is what is going to make returns for you in the long run. The tenure is more important than trying to play for the short run.
Kartik, the same question to you and if people want to be in equity or have a lower appetite for volatility, would low volatility funds be an option, or you don't agree.
Kartik Jhaveri: I think it's very different because for me everything is based on financial goals, the situation of the person, what his long-term vision is, what his current circumstances and how he would like to plan life and future.
So, a lot of times a lot of brokers and advisors do ask for movements and do suggest these moves, because there is volatility, let’s go and stay at a safe zone for some time and come back, but it's almost impossible. Time and again we have seen it is impossible to say that today we are at a high or today we are at a low for the next 10 years and things like that.
So, my sense is yes, why not keep some cash available. It's always a good idea to have about 20-30% cash. Nothing wrong with doing that, and when you find that the market dips, or every time you see broad indices down by 2-3% which is like a serious amount of discount that you will get for a lot of stocks, that maybe the market is down 2-3%, individual stocks could be down 5%, 8%, 9%. So, these are days in which you should probably buy, these are days when you, if you have liquidity, buy that mutual fund. These are days to do that lump sum kind of a purchase also if you want.
But otherwise, the best way to handle volatility and if you think there is volatility then you expand your STP duration. Now what we tend to do a lot of times, is when we invest in mutual funds, we tell people markets will be volatile. So, we'll divide the money into 12 parts, and we will enter the equity markets into 12 zones and divide it further by a week and in 52 steps you are entering the market.
If you are feeling aggressive about it, then within six months you deploy the money or four to six months, break the money by six into 24 weeks and get in. If you are extremely conservative about the whole thing, well, take 18 months’ time to enter the market but then of course don’t take anything longer than that because then you will miss the rally also, on the top side.
So, in that sense if your goal is retirement, children's education, buying a new home, making down payment provision, and doing something that you are going to spend after 10 years. How does it really matter, 10-15% volatility is going to mean nothing. So, stay put with your equity strategy.
Of course, if your situation is that part of your portfolio, which needs to be debt or at a lesser risk quotient, then by all means be in the balance advantage fund and be in the hybrids. In fact, you could even be in pure debt funds because debt funds also have a cycle.
Somewhere I feel that the interest rates in India and given the Indian situation we are more comfortable than the rest of the world. We may not find that recessionary or inflationary pressure in our country. So sooner or later we will find interest rates starting to reverse and which means if you are invested into a debt kind of fund now, whether it's simple short-term debt fund or a banking PSU fund or something as advanced as a government securities fund and corporate bonds, I think going two, three, four years ahead you might actually make good money because the interest rates keep coming down, your gains will keep rising higher.
So, my sense is I would segregate things for the items that I need for my long-term activities, my long-term goals, my long-term aspirations, equity is absolutely fine and otherwise I would not make tactical allocations for the next six months, and then take a decision based on it.
Kartik, just a quick follow up there, somebody has a six to nine-month horizon for parking money in debt products until the time she or he actively takes a decision to invest in equities. What's the best debt option to do that, the time horizon is six to nine months?
Kartik Jhaveri: Let's go to a banking and PSU debt fund and we will earn a good 5.5-6% and because the mutual fund show, we will talk about that fund for the benefit of viewers in general.
One can also consider the option of peer-to-peer lending. You might also get a decent rate there, six to nine months you don't need to worry about 10 years later, it will become an everyday thing to talk about P2P lending but go and invest there also.
You might get a rate which is as high as 9 or 10%. Of course, on an annualised basis but your net realisation will be higher than that of a banking PSU fund or a short-term liquid fund also.
Juzer, for somebody who has got a slightly shorter-term horizon on the debt side, is the banking and PSU funds a good option or do you have a different recommendation as well?
Juzer Gabajiwala: I would be in debt also; I would look at how aggressive the guy wants to play it. A moderate investor frankly, the person should just look at short-term debt fund as an option or ultra-short term, because in the shorter terms YTMs are much better than on longer duration because banking PSU will be having much more larger maturity papers and if there is a 0.5% hike over there, supposing you know interest rates go up by another 0,5% from here in the next three to six months, then the impact on a banking PSU fund will be much more than on a shorter duration fund.
It is better to be on the shorter duration side than trying to be aggressive on a longer side and specifically if the person has a moderate risk-taking ability, that’s what I would advise.
Kartik, I didn't qualify the risk appetite of the person, if the person is not a high-risk investor but a moderate-risk investor, would the banking PSU debt fund still be a good option or as Juzer suggested maybe there could be a hit and therefore some other option that might be better.
Kartik Jhaveri: There could be a possibility of a little bit of a downside movement to it which is why I would stick to things like peer-to-peer because there is no such movement activity, there is not a mark-to-market kind of a product.
So, if you are ultra conservative, to a large extent, yes, I agree what we should do is either go into a fixed deposit, just eliminate all sorts of doubts whatsoever, or get into P2P instrument, so that you know your return is more or less clear cut, defined before you even enter. Your exit is also very clearly defined.
Kartik, IDFC Mutual Fund has a change at the helm of equity investing. Anup Bhaskar is moving out, Manish is coming in, both accomplished but both have different styles presumably. Are people who are invested in equity funds at IDFC MF, should they take any decisions to change or alter their positions out there in IDFC MF schemes?
Kartik Jhaveri: Okay, the first immediate gratification answer is, do nothing, don't do anything. So that's the answer that kind of puts most of the people's thoughts in confusion at rest.
So, now let’s expand it, if you look at the history of our mutual fund industry, I remember a time there was a mutual fund called Kothari Pioneer and then there was Itc Threadneedle and then there was Zurich and then there was HDFC. All this kind of sequence of events happened. I have even held funds through Itc and its journey into Kothari, Itc’s Zurich get into HDFC. So, it's okay, these things are normal.
In the recent past, we have seen restructuring happening with L&T Mutual Fund as well when L&T sort of took over HSBC’s business. We have seen all of that, nothing structurally to really redefine your mutual fund portfolio just because their leadership has changed. What happens is there are always some funds which will be in the top quartile or top decile. In the case of IDFC, two of their funds, sterling and tax planning, are already doing well and they are in the top three or five-year almost on a ten-year basis also.
Somewhere it's on rank 11 which I just saw, but otherwise, it's on the top 10, the others are laggards. So, whenever a new management comes in, we hope that they will fix the challenges of the past and they will make other funds also better. Now they have a motivation to do that also because if they make their other funds’ performance better, naturally investors will get attracted to it, brokers and distributors who recommend their funds and that also results in profitability for the fund house itself.
So, whenever there is a change at the top level, I think it's a welcome move because there are new thoughts, new ideas, new energy. So new activity gets infused into the organisation, and we can always hope for a better future.
So, I don't think there's anything that you need to worry about. There's nothing to prompt you to get out of it. There is no scam, there is no negative news of such a leadership, normal thing restructuring, acquisition of one mutual fund from the other, very normal, very fair, standard activity of business, so I would think just relax on that and don’t worry too much.
Juzer, same question to you, does it make you think that maybe if you had exposure you would change?
Juzer Gabajiwala: No, I don't think so. Whatever Kartik said is absolutely correct. There's no point in trying to have a knee-jerk reaction. We have seen the biggest change. You saw Prashant Jain moving out from HDFC and I don't think anybody asked a question at that point of time. But the processes have been set in place.
So, I think the more important is that, in fact let us look at when Manish came into Nippon, at that point of time also we had seen that steadily there were changes. But I think the important thing is to also see and understand the journey of the person.
Anup also had a great run at Sundaram. I mean Sundaram mid-cap having excellent performance right throughout his tenure. So, he made his mark over there, he moved to UTI, moved to IDFC. So, nothing to take away from him that just because he moves out and somebody else is coming in.
So, every individual has his own aspirations and I believe that you know, people will keep on changing at any of the fund houses. So, this is something which each investor will have to know, take it in their stride, that this is going to happen. Now, whether it pans out ultimately, is going to be a wait and watch because like as even Kartik mentioned that you get new ideas, new thought processes.
So, we always believe that change is only constant, keep on accepting the change and moving forward. How it is going to pan out, time will tell because of exit today, how does it matter it is the same, there's no change in your portfolio. So, you cannot say that you are basing your decision on the basis of what Anup going out or Manish coming in because there are other fund managers also.
Each fund house now actually tries to look at having a process in place so that the process does not undergo a change. I think everyone is trying to institutionalise the entire thing because we are going to see a change of guard at a lot of places, and it is going to happen, because now we are at a stage where the mutual fund industry is also growing.
The final question really on NFOs because there were so many of them touted to open, some are open and some of them will open over the course of the next 6 to 12 weeks. Any NFOs that you are watching out for in the period of the first quarter?
Juzer Gabajiwala: Nothing specific as of now because there's nothing which is something exciting, a new theme or something which is coming up. But to connect with the first part of the question, if somebody is looking at trying to time the market and he feels now the market is too high, then NFO is a good to get in.
The fund manager has to start on a clean slate, and he will have time to build up the portfolio, he will also be seeing the same stocks, in terms of whether to get in now or whether to hold. So, where people don't want to have the headache of doing STP over a period of 12 months and doing all that, the NFO becomes a good entry point for those investors because otherwise most of the categories are already covered.
I think all fund houses are only trying to fill in the gaps and we are seeing some more action, more on the thematic side. So as of now, there is nothing as a particular segment which comes out as a real standout, are very differentiated product, no one is coming out with a very differentiated product which looks very exciting or anything as of now.
Kartik, same question.
Kartik Jhaveri: I subscribe to Juzer’s view 100%. NFO I would look at when there is a new innovation, new idea or there is a compelling case. For example, in the past we have seen a situation where the small-caps were really the beaten ones, that was I think in 2013-2014 also we saw that in 2018-19 also.
So, there was a case that if a small-cap fund is coming here, the index is already down, the opportunity is tremendous and even if there is a close-ended fund, we would go ahead and make some recommendations there because the opportunity was absolutely visible or there is a completely new innovation that happened something that we've not had or we are getting opportunity, let’s say, to get into a Brazilian market or a natural resources, a new energy or renewable energy, kind of funds something completely different, or something which we have not done before.
Then in my view it is something I have maintained most of the times, NFO is not really an opportunity for investors to come in. It is actually a business strategy for the fund manufacturer. So, it's not something that is an open invitation to come and subscribe, you get something cheaper at Rs 10 as well. Sometimes you want to watch the performance and do it, sometimes it’s a me-too product, sometimes like Juzer said, it is filling up a gap, all those things happen. So, nothing really on the NFO front that we are recommending.
There are a couple which already exist. Those themes are already available in the market. So just because they are coming out new, there is no reason why we will take am entry even if they are coming from a great pedigree of a good fund house.
So, I think there's nothing on the recommendation list at the moment. We'll just play by ear as it moves along, see the performance and then at some point in time make allocations. But investors need to remember it is not an opportunity for you, it is a business for the mutual fund, I mean it is a business case, you know, straightforward, so why not do it. If I was at their place, I would also launch a product if I didn't have one or I saw an opportunity there.
What I am trying to say is that, don't have that fear factor getting into you. So just because you don’t invest in NFO doesn’t mean you are losing out on something. There are enough and similar products available in the market, there is history also, so you are listening to a lot of financial professionals, you are probably doing your own due diligence also. Look at the market, look at the situation, there is another opportunity, but there is no fomo here.