The Mutual Fund Show: What Should Investors Of Axis Mutual Fund Do?
Axis Mutual Fund has been in the news over allegations of front-running by two of its fund managers.
refers to using confidential information to profit. Since reports of alleged irregularities emerged, social media has been abuzz with investors questioning whether Axis MF funds are at risk of poor returns.
The matter is still under investigation but possible front-running should not impact fund management, Kshitiz Mahajan, co-founder, Complete Circle Capital, told BQ Prime’s Niraj Shah. Existing checks and balances may be further strengthened after this incident, Mahajan said.
Investors should judge the funds by their performance, he said. The fund house has reassigned responsibilities in seven funds, which have combined assets under management of over Rs 7,700 crore. Mahajan is hopeful that there won’t be much damage to NAVs as a result of this.
Axis AMC is known to invest in quality stocks, and therefore getting out of some of those names won’t be a problem, he said. “A surety has been given, they are managing more than Rs 2.7 lakh crore of assets, and have the largest equity assets with them at the AMC… One should stick around, unless and until there is an objective of the scheme which they are planning to change.”
According to Mrin Agarwal, financial educator and founder of Finsafe India, investors should wait and watch, and not have a “knee-jerk reaction” and exit from the fund. “It's a good fund house and it's got a good performance.”
Agarwal agrees with Mahajan that liquidity is not an issue for Axis MF, and they should be able to honour commitments of redemption.
Are Small Cap SIPs A Good Bet?
Since small-cap stocks have taken quite a beating, investors are wondering whether to invest in small-cap funds.
Agarwal recommends SIP in small-cap funds currently because on a long-term basis or 10-year plus duration, “you will always find that there is a good amount of alpha that you can generate there”.
She cautions that there will be a lot of volatility but the key is to remain invested to the tune of 15% of equity allocation. She recommends DSP Small Cap Fund and SBI Small Cap Fund as good options.
According to Mahajan, investors should not expect one-month or three-month returns, but instead look at the rolling returns. Investors should opt for funds with consistency of fund managers and performance, and low beta portfolios with less volatility, as the space can get hammered by low volumes and low liquidity in certain stocks, he said.
Mahajan suggests starting an SIP and gives examples of funds such as Kotak Small Cap Fund and Nippon India Small Cap Fund, apart from the ones mentioned by Agarwal.
Watch the full show here;
Edited excerpts from the interview:
Kshitiz, let’s start with the Axis MF developments. A lot of people on social media are asking, 'Should we keep our investments there? Should we take them out? Should we think about making new SIPs or newer investments in other mutual funds, irrespective of how Axis funds may be doing, because there is this event that has allegedly happened?' What is your view?
Kshitiz Mahajan: For the understanding of everyone, how a mutual fund manager works is very important here. There is a fund manager assigned to a particular fund. There can be a co-fund manager. There's a dealer assigned and there are common research analysts which provide research to various co-fund managers.
The fund manager normally trades through the assigned dealer–because you buy underlying stocks in a fund or ETF–that's how the trade is placed.
Now, in this scenario, they have still not reached any conclusion. Seven funds have been talked about, that there might be a chance of front running–out of these, five are ETFs, one is a value fund, and the seventh one is a Quant fund.
And front running doesn't affect the fund per se, it affects somebody who's doing (it), and it might affect the fund if the underlying holdings are not the right holdings.
But having said that, these are ETFs which were there, and a couple of other funds are value and bond funds.
We have got statements from Axis Bank yesterday, and three days back from Chandresh Nigam, the MD and CEO of Axis Mutual Fund. The charge of Rs 7,700 crore of funds have been given.
There's not any major movement of NAV, and the movement (is) because of market fall only. I have not seen anything which has moved because of this news. My sense is that let's give some time before things unfold.
With the other funds, there is no need to be even worried about. It's a good fund house and then there are these types of things which should be avoided, but if it has happened, they are doing the investigation at their end since February onwards.
It's an internal investigator of Axis, which is doing the investigation. That gives the comfort that they will reach some conclusion and will realign funds as per the objective of the fund.
I don't see a reason that one should look at redeeming or stopping SIPs right now because there is no movement. Markets are falling otherwise, maybe the fund NAVs have fallen but there is no movement as such.
A surety has been given, they are managing more than Rs 2.7 lakh crore of assets and have the largest equity assets with them at the AMC.
So that's my conclusion or belief that one should stick around, unless and until there is an objective of the scheme which they are planning to change.
Mrin, you would have observed instances of this nature, not necessarily in AMCs but otherwise in markets. Is this a good reason for people to feel worried about their investments or should it not make people too worried?
Mrin Agarwal: Certainly, I think people should be watching out. It is a bit of a cog of a worry, but not a cause of worry enough to have a knee-jerk reaction to exit from the fund, at this point of time. In this specific case, it's a good fund house and it's got a good performance.
Liquidity in these schemes is not an issue. Most of them are ETFs with large cap holdings. What we've seen from past instances is that the regulator has always come out with a new set of regulations, tightened regulations, and tried to make the system more foolproof.
I really don't know how they would do it in these cases because there are already a huge set of regulations and restrictions in place.
What an investor is probably looking at now is what can be done to protect them from such instances in the future. It is a cause of concern.
I think you need to wait and watch, do not have a knee-jerk reaction and exit. Again, if you're not comfortable, there's a lot of liquidity; you can certainly exit. But remember, you are exiting when markets are down. There could be an exit load and a tax impact.
Let's assume the markets were higher. Would you exit from these schemes and look at other AMCs or is this not a cause enough for you to exit the AMC altogether?
Mrin Agarwal: It's not a cause enough at this point, given the amount of information that's there.
If an investor is uncomfortable and they're not feeling happy about all of this, then (they can) look at exiting.
In any case, a lot of the funds are sector funds, which I don't recommend. If you are not comfortable, you might as well exit.
Do any of those alleged events impact the returns for somebody who is invested in the fund?
Kshitiz Mahajan: It can impact the return part, because had it been somebody's front running any script in the portfolio, the certain jump–which is not an everlasting jump–can spike the return of the portfolio. Normally, that should not be the criteria but most people look at past performance and that's how they come.
But one comfort which I get from their MD and CEO’s statement is that all the funds are open for redemption. Anybody can redeem whenever they want to. There is enough liquidity in the funds, if you actually go through the underlying security.
Obviously, people have lost their money in fixed income deposits like IL&FS and DHFL. So, there is a cause of worry that this news has floated. A couple of days were really very bad, the initial couple of days. Equity markets were also falling, and these types of news actually led to (a worry) whether your money will come back or not. But it was maturely handled by Axis Mutual Funds and Axis Bank.
Having said that, if a client has a bit of discomfort at this level also, then you should move out.
I don't even remember whether I have an investment in Axis or not, because I don't look at my portfolio. That's what we tell clients–don’t look at your portfolio. I would not have redeemed because I feel it's a fairly mature and good fund house.
If you both had investments, presumably, you wouldn't get out of it. That's what Kshitiz said. Mrin, I presume that’s your answer as well.
Mrin Agarwal: Yes, I do have some investments in some Axis funds, and I haven't moved out.
Now Mrin, the second part of our discussion is around small caps. A bunch of funds which have come up rapidly in the last few days. A lot of people say that this time could really be different because of a liquidity crunch and inflation. If somebody has investments in small caps or is thinking of putting some money into equity funds, are small caps a good option to start an SIP or lump sum? Or would you wait and watch, or avoid them altogether and stick to large caps or large and mid caps?
Mrin Agarwal: I always recommend a bit of small caps in the portfolio, because on a long-term basis, which is of course 10 years plus, you will always find that there is a good amount of alpha that you can generate there.
When you also look at long-term rolling returns, you find that small cap funds have done very well in the past as compared to mid cap or large cap. Certainly, have a 15%, maybe 10-20% allocation to small caps.
But the key is your behaviour when you have invested in that small cap. It's easy to find a fund to invest into, but it's that much more difficult to remain invested. This is what is going to be more challenging in a small cap because you're going to see volatility. There's a huge amount of stock return variance within small caps as well. How are you going to handle that? Rather, are you going to do something about it or not?
Essentially, if you want to invest in small caps, you need to have a 10-year time frame and you need to remain invested. Of course, you need to choose the right fund as well. But the main thing is really about remaining invested for the long term. Certainly, it's difficult to say what's a good time to invest. But from a larger allocation perspective, I would certainly recommend some amount into small caps.
So, start an SIP at the current juncture as well. Is that what you are saying?
Mrin Agarwal: If you are in it for the long term, why not?
Kshitiz, what's your sense considering all that's happening around us and the kind of deep gashes that we have seen at that end of the spectrum. Should people initiate SIPs or lump sums or continue with their SIPs in small cap funds?
Kshitiz Mahajan: There is a set of clients or risk profile for which a small cap fund is right. In your multi cap funds or in many large cap, or large and mid cap funds, sometimes you will see small cap allocation.
Young people, up to 35 or 40 years of age, should have allocation towards small cap if their risk appetite is a little high vis-a-vis other clients.
At this juncture, you can start SIP anytime in small cap for this type of investor profile. There can’t be any issue with regard to good fund managers and fund houses. So, there are three to four funds where I see a lot of value building up.
Small cap allocation cannot be done for five or six years, it has to be for seven to 10 years. There can be a phase of three to four years that is low performance, and there can be a year where there's a jump of 120-130%. That happened with most of the multi cap funds also.
I seriously feel that forget about small cap or large cap or any other category, this is the time one should actually go slow on STP also, because we might see consolidation happening across markets and you don't know which way it will go.
So, my sense here is that STP should also be a little long, for four to five months across portfolios, and SIP can be started in small cap up to 10% of allocation.
One should look at those funds with low volatility, with good rolling returns and consistency of fund managers because in small cap, you have more stocks in the portfolio vis-à-vis other portfolios because you can't take 5% allocation in a single stock in small cap.
At the same level, if the consistency of the fund manager is there with the fund, then you can see better hand-holding rather than new fund managers coming in the picture. So, I would like to go with the funds where you have the consistency or longevity of the fund manager with the fund.
Are there any examples, Kshitiz? Are there houses and schemes that you think are well-placed?
Kshitiz Mahajan: SBI Small Cap Fund and DSP Small Cap Fund. These are just examples, there is no recommendation. Both the funds are being managed by their CIOs. SBI is managed by R Srinivasan and DSP is managed by Vinit Sambre. So, when the seniormost person in the team is managing small caps, it gives you more comfort.
They have been managing this fund since the time of inception, over the last 7-8 years. These are two funds which denied taking allocation in the portfolio as a house when they felt that this is not the right time to take allocation in small cap, and they closed the funds. They opened up as and when there was an opportunity.
Another example is of Kotak Small Cap Fund and Nippon Small Cap Fund. Again, the longevity of the fund manager is there with the fund house.
These three to four funds have done fairly well over a period of time. The DSP fund has been lagging in the last five year returns, around 13-14%, but that should not be the cause of worry because the fund otherwise has done very well overall.
But the idea is if the longevity is there of the fund manager, and if a fund house is playing out right by not taking money when they thought that the size is big and they can’t take more money, I think you should look at these types of funds.
Mrin, what are the funds that you believe people can choose in the small cap category?
Mrin Agarwal: I concur with Kshitiz. My recommendation is also DSP Small Cap Fund and SBI Small Cap Fund for the reasons that he has outlined. One is the consistency of performance and, of course, consistency of the fund manager.
When you are investing in a small cap fund, you are looking at a fund house that has the ability to do good research and execution at the same time. Having a fund manager managing it from inception, and we have seen good performance, we have seen them looking at buying good businesses which have healthy competitive advantage. So, I would still go with SBI and DSP as my bets.
The final question–what would you do if you were investing into international markets through mutual funds, and that came to a grinding halt about a month or two months ago? Do you keep some money aside hoping that will change soon or are you not doing that currently?
Mrin Agarwal: It's looking difficult in terms of seeing the limits really getting increased for various reasons. But I would still keep some money aside because certainly, if you look at overseas markets, especially the U.S. markets have corrected anywhere from 16% to 20-25%. So, it's a good time to look at keeping some money aside and may be looking at investing in tranches.
Of course, you can still invest in FoFs that are investing in ETFs abroad. So, there are a couple of them that are available.
I would actually wait for some time before investing that money. But certainly, I would keep some money aside for this particular purpose.
Are you hoping that the ruling will change soon?
Mrin Agarwal: I don't know about that. As I said, there is still an option to buy an FoF that invests into an ETF, and there are about four or five of them available.
I am hoping that it does, but it's looking a little difficult because all of these decisions impact exchange rates, which are not great right now, in any case.
So, I don't know. We have to wait and watch but I would keep some money aside and if nothing happens in the next couple of months, then maybe look at reallocating that capital somewhere else.
Kshitiz, what about you? What are you doing when it comes to your international investing because the fund route is closed? Do you keep some money aside, hoping that the ruling changes sometime?
Kshitiz Mahajan: We diversify to have a better alpha. If you take out Reliance from the index, we are already at 20% correction level. It's Reliance who’s holding the markets. I am not clear about whether it will happen now, or a year later, or six months down the line–the discount is already there in the Indian market in itself.
I would like to do a four-month STP for clients across funds in domestic funds only, and as and when the limit will increase, you can then rebalance the portfolio.
The U.S. market has also corrected. I'm saying in India also, there's a huge discount. Tomorrow, if the dollar strengthens, the situation will not be that good. When there is a discount in the Indian market, and it's a fairly healthy discount which is there in Indian markets, you should not wait for that regulation or approval to come in.
If you have done a STP, otherwise your money is lying in a liquid fund. If that regulation comes, we can stop those STPs and park your money here also, but at the same time keep taking the opportunity of these levels where there's a discount in the market.