The Mutual Fund Show: What's The Ideal Portfolio For High Risk Investors?
Investors may need to avoid a "high risk, high returns" strategy and shield themselves from prevalent market volatility.
Aggressive investors need to forgo the "high risk, high returns" strategy while building their portfolio and take steps to shield themselves from market volatility, according to Amol Joshi, founder of PlanRupee Investment Services.
Investors can dedicate three quarters of mutual fund investment over a five-year horizon towards equities, Joshi told BQ Prime's Niraj Shah. The lion's share of this—around 60%—should be centered around large-cap or flexi-cap funds, with the balance going to mid-cap and small-cap funds, he said.
The remaining portion can be parked with balanced advantage funds instead of debt funds, based on the theory that equities will perform better than debt over a five-year period on a post-tax basis, he said.
According to Sunil Jhaveri, founder and chairman of MSJ MisterBond, large caps are good bets for the stability they offer, though mid caps can also be a viable option. However, investors need to be cognisant of the volatility when getting into small caps, he said.
View the full video here:
Edited excerpts from the interview:
A lot of people believe that they want to go ahead and stay invested in mid- and small-cap funds and some people believe that they want to take the safety of large-cap funds. Where is it that you are telling your clients to put in money that is currently fresh for a near period? Is it the large-cap space, or is it the mid-cap and the small-cap space?
Sunil Jhaveri: Large caps become the anchors in any portfolio. They give you stability in a portfolio. Mid-caps, yes, I would still go towards mid-caps; large and mid-cap is the space in which I would recommend my investors. But when we wish to get into the small-cap space, one must be extremely cognizant of the fact that it is extremely volatile...
In the index space, yes, small caps will not really make any sense because, in small caps, the fund managers will have to select the right stocks for them to pick and choose and then invest because small caps are a sentiment-driven market rather than a fundamentally driven market. And small caps have a much larger space versus the large caps' and mid caps' space... So, for those who don't understand when to exit out of small caps and those who do not have the stomach to digest volatility, I would recommend not being in the small cap space at all… Large, and mid-cap is the space in which they should be, not beyond that.
Amol, for people who are looking at the markets a bit more actively, would you still recommend looking at the valuations, etc.? Is it better to be in the safety of large caps, or can people also take in mid-caps and small caps and small caps in particular, for generating the right kind of portfolios?
Amol Joshi: A typical investor is constructing a portfolio not just for one financial goal… Once you have multiple financial goals that you are planning for or constructing a portfolio for over the longer term—seven to 10 years and above—we are still, you know, comfortable recommending mid and small funds… Especially if you have exposure to be taken via the SIP route. If you have some lump sum amounts, then I agree with Sunil that that would go towards the large cap… So, I would say mid- and small-cap funds, and dedicated funds as well, are something we would probably recommend for somebody who takes exposure via SIPs and has a seven- to 10-year investment horizon... We have always spoken of asset allocation… Don't just think that asset allocation is between equity, debt, gold, and international equities or alternative assets. Asset allocation must be there within the equity segment… If you ask me, please give me an asset allocation within equity. I will say 60% into large caps or flexi caps and the remaining 40%, 20-25% each into mid and small caps with a seven year plus investment horizon, is how I would construct a portfolio today.
This is also for people who may not be completely well initiated in the markets; within seven years, they will take care of that.
Amol Joshi: Yes, this will take care of that... SIPs will get you averaging. Now we all know that the seven-year journey is not one way of experiencing what the market will deliver to us, but in the averaging aspect, if you continue your SIPs for a seven-year duration, I think there is a case to look at mid- and small-cap funds.
Sunil... Now that the point is they have been shunned for so long, I think the most obvious answer at any given point in time in the last 10 years would have been no, don't look at PSU stocks or PSU funds. But I think there's a case being made here. For people who say, "Why not PSUs?" because there are a bunch of them that are now starting to do really well, they are not just fluff in a season kind of moves. There are some serious fundamental reasons for some of the PSU names that are making some serious moves and making new life highs. So, my question to you is: Sunil, if there is a PSU fund available, why should an investor not take a PSU fund?
Sunil Jhaveri: Well... the average return in the PSU index is only 4.5%. So, it's neither here nor there. Basically, PSU became a theme, or a flavour of the season last year only... It is better to let the fund managers decide whether they wish to be in those PSU stocks within those flexi caps or in the multi-cap space or even the large-cap space if they wish to be there. If you try to get into a thematic sector like a PSU fund, infrastructure fund, tech fund, etc., somewhere down the line you will have a very miserable journey. First and foremost, you will not understand why it is underperforming… We have done a show on Prashant Jain and his favourite PSU funds. He had conviction; he stuck to that conviction, and all his funds started doing well. So, whether you believe in those convictions of the fund managers and you wish to be in those schemes, it is your call to get into those PSU stocks or not.
Okay, so Sunil is saying, "Hey, let the fund manager decide," and if PSU is a hot theme, then a good fund manager will pick up on that theme and include some of the stocks in the portfolio. So, don’t take the added risk of investing in a thematic fund like PSU funds. Actually, I think your views are probably true, and you are probably saying this for a bunch of thematic funds and not just PSU. Amol, is your answer different?
Amol Joshi: From 2016 to 2020, a roughly three and a half to four-year period just before Covid kicked in, you had Pharma and FMCG, which can be called the most defensive sectors. Now this was the time when the market was going up; Nifty, the large-cap segment, was going up, but you had three and a half to four years of underperformance in Pharma. What stops PSU from underperforming … PSU funds have underperformed Nifty on a five-year and 10-year basis. Now, all of us on this show and the people who are listening are probably informed investors. All of us invest in equity for longer investment horizons. So even if, on a five-year or 10-year journey, a particular set of stocks or theme has not performed, I do not understand why I should get swayed with a small one-year or one-and-a-half-year kind of window and go and get attracted to that set of stocks or PSU theme. I would say there is no need to jump on the bandwagon purely looking at the past returns. And like Sunil mentioned, all the stocks in the PSU basket can be purchased by a fund manager if the fund manager sees conviction, if the fund manager's research says that the PSU is going to have a good time going ahead. You will get that exposure in any diversified fund, including pure large-cap, pure mid-cap, pure small-cap, or even a flexi-cap multi-cap product basket.
Sunil, I just wanted a quick follow-up after you mentioned Prashant Jain’s funds. Are there other funds in the current scenario that are taking a bet on some of the PSU stocks more aggressively than the rest because, for example, ICICI as a house has been talking about PSU stocks for a while?
Sunil Jhaveri: I was going to say the only name I could think of was the ICICI Mutual Fund and some of their schemes. So, specifically, I would not remember which schemes or which fund manager have taken more bets on PSUs.
My last talking point for today's show is: how should a high-risk investor, or an investor who's willing to take high risks, design a model portfolio of sorts for the next five years?
Amol Joshi: I want to start with a common misconception. People say that risk and return go hand in hand, but it is not a directly proportional relationship. The higher the risk does not necessarily translate into higher returns. When somebody says that I am a high-risk investor, even if you say so and even if it kind of gets approval with the kind of risk appetite analysis that typically we would do for our investors, even when we do that, we will also look at the market valuations... We are not betting on one particular stock; if it does well, our fortunes will change. A mutual fund is a diversified instrument, so anywhere from 30 to 60 stocks will be there, and valuations will play a big role. Coming back to answering the question, in a pinpoint way, I would take the thread out of my previous answer. The equity allocation today can be roughly 60% into large-cap and flexi-cap funds and the remaining 40% to 50% into mid- and small-cap funds. But within that, even if you are an aggressive investor, at today's juncture, I would slightly tweak that asset allocation also… Maybe 20% to 25% I can probably park into a debt fund, or I can probably park into a balance advantage fund, where I am not completely exposing myself to the market and any potential volatility of the market. But if it were to come, then I would have that nice chunk of 1/5 or 1/4 of the portfolio entering at a low valuation if the opportunity were to arise. I do not think that going 20–25% into a balance advantage would significantly alter my return profile five years later, even if there is no significant dip for the next five years, which in itself is unlikely, but you get the point.
Okay, so out of 100%, 35% are in BAFs, and the remaining 75% are in equities, of which 60% are in large-caps and Flexi-caps, and the rest are in mid-caps and small-caps?
Amol Joshi: Yes. That's how I would currently design this aggressive, high-risk portfolio, given the current state of Indian market valuations.
As it's an aggressive, high-risk portfolio, you are not including debt funds?
Amol Joshi: Yes, you have not just given me the aggressive risk profile; the five-year investment horizon is also there, and I tend to believe that over the next five years, equity will do better than debt on a post-tax basis.
Thanks a lot for that one, Amol. Sunil, how would you design this?
Sunil Jhaveri: First and foremost, my biggest disconnect with the mutual fund industry is when we are bracketing investors as aggressive and conservative, because you and I know that the most aggressive investors become the most conservative when the markets go against them. So, there is nothing like an aggressive investor or a conservative investor, according to me. Either he is a rational investor, or he is an irrational investor. When I say rational investor…
Sunil, let me define this so that it becomes easy. There are some investors who are happy with a high single-digit return and don't want to take that excessive risk in order to make a higher double-digit return. And I am talking from the perspective of an investor who doesn't mind taking a bit of a risk in order to ensure that she is not in the bracket that is earning a higher single-digit return. She is willing to take that additional risk so that she gets a higher double-digit return.
Sunil Jhaveri: So, let the investor answer these two questions, which I have to post to them. First and foremost, when the markets were at a high valuation, they invested in mid- and small-cap funds in 2018–19. When the markets collapsed in March 2020, did you exit the markets or did you invest more in them? If this brought you into the markets, then I would assume that you are a risk-taker and you don't mind taking that additional risk or seeing your portfolios bleed. It’s like Mark Zuckerberg saying that $140 billion comes down to $40 billion. He's a high-risk taker, an entrepreneur, or an investor, but I don't think investors in general have that appetite to stomach such volatility. So, what I am trying to say is that we should be bracketing our investment strategy as aggressive or conservative based on market valuation the way Amol just mentioned. And that's where I believe that money should be... That's the way I would position a portfolio for any investor. But to make him say that I am an aggressive investor, I don't mind going all out into equity at any valuation, even in small caps. That would be misleading the investor.
Okay, Sunil, my final question is for you. You argued to post the question to the investor and say that she is saying that she's been doing an SIP, and through the fall that happened in Covid, her SIPs were on. So that's the nature of this investor. At the current juncture, should she stick to 50% equity and 50% debt, as you mentioned, or should she do it differently? How will you design her portfolio?
Sunil Jhaveri: Perfect, so you know, if that person has actually stuck around during that March 2020 correction and maybe stepped up the investments, then I think she is a very rational investor, and that's where I want to differentiate between a rational investor and an irrational investor. So, if you are a rational investor and you don't mind stomaching the volatility and stepping up the investments when the opportunity arises, then this 50-50 kind of portfolio with 50% getting switched into equity as an STP or a value STP, or whatever you want to call it, is the right way of going about it.