The Mutual Fund Show: How To Invest In Equity, Debt During Uncertainty
REITs and InvITS can be great strategies for someone looking to invest in equities or hybrid allocations, including commodities.
Staggering one’s investments in equity funds instead of putting in a lump sum is a better strategy in the current climate of uncertainty, according to Mohit Gang, co-founder and chief executive at Moneyfront.
A systematic transfer plan or a systematic investment plan staggered across the next nine to 12 months is the best approach, Gang told BQ Prime’s Niraj Shah during The Mutual Fund Show. Large-cap or flexi-cap funds should be the preferred picks based on the safety they offer, he said.
Real estate and infrastructure investments trusts can be great strategies for someone looking to get into equities or hybrid allocations, including commodities, said Gang.
Investors with a long-term horizon of five years or more should consider large- or flexi-cap funds, Gang said. Flexi caps act like pseudo-large caps, with 10–20% allocation to mid caps and a minuscule composition of small caps. “They give you that dynamic flavour across your portfolio.”
In the case of debt funds, Nikhil Kothari, director of Etica Wealth, recommended target maturity funds along with dynamic funds for those with a slightly longer horizon.
“We are very bullish on target maturity funds in terms of exposure when they match the client’s horizon. Apart from that, if someone is willing to take on high volatility in the short term but believes in the overall interest rate and is ready for staggered investments over the next six months, they can look at long-term funds or dynamic bond funds.”
On a short-term horizon, one can expect 6.2–6.5% as a return from target maturity funds, Kothari said. “If someone has got 2026 or 2027 as a horizon, then they can expect a yield of around 7.3–7.5% minus 40–50 basis points.”
Watch the full conversation here:
Edited excerpts from the interview:
If there is a viewer who has come on the show today and she's not comfortable putting down lump sum money to invest in mutual funds because she fears that there is a bit of a period of uncertainty ahead. But she still wants to invest that money. What is it that she should do? What is it that you would advise her to do?
It's known that markets have been a bit volatile of late, and relatively, India has done exceptionally well. The US markets, or let's say Nasdaq, for the year to date have been down almost 29%. The Sensex is up by four percent. So, the dichotomy is huge. I can very well understand why investors are skeptical. They are sitting on the borderline; they want to invest, but they are also wary about markets correcting globally—interest rates are on the boil, oil is on the boil, commodities are rising, and so on and so forth. But the Indian equities are not related. In this scenario, honestly appreciating the fact that we are extremely overvalued, our suggestion to clients right now is to stagger their equity allocations and not jump in with a lump sum. Honestly, I think there's no point being a cowboy in this market. I think the relative outperformance has lasted for almost one and a half years. It is perhaps likely that we might relent another under tremendous global pressure. So, an STP or an SIP approach staggered out across the next nine to 12 months could be the first best approach. A second thing on the equity front… is to be a little safe in the cocoon of large caps, or flexi caps at best. I think that's a safer zone right now; if you want to increase the allocations currently to equity, go towards this side. The third point in the same breath is that if you really want to get into equities, then you should also consider hybrid allocations right now, which could be a balanced advantage fund or a multi-asset fund. This can be a great strategy. It gives you the best of both worlds, or perhaps, in the case of multi-asset, the best of multiple worlds, including commodities and a bit of REITs and INVITS. It kind of gives you an automatic hedge... I think that's something that each of the clients should do right now if they are actually wanting to invest in equities.
If somebody has a time horizon of over five years… Should that person also take advantage of the relative safety of the large caps, or is it better to make a staggered investment in, say, mid- or small-cap funds?
Mohit Gang: I understand that it's a long-term story. Perhaps all markets are good in the long term. I can't fault U.S. markets or even Indian markets for that matter. If you are investing for 20 years, yes, you can take a slightly more aggressive stance on the market. But to be very honest, I think we are all investors at the end of the day, and we would like our capital to work in our favour at all points in time... Given the way the markets are stacked up today, I would actually prefer a large cap or a flexible cap approach. The reason why I have included flexi caps is because to me they work like a pseudo-large cap, but they will still have some 10-15% to 20% of mid cap allocation or maybe a very minuscule composition of small caps. They give you that dynamic flavour across your portfolio. But yes, I would rather go with that approach right now in the current context.
Nikhil... Are you being conservative… What would you advise them?
Nikhil Kothari: The Indian market, as Mohit already highlighted, has outperformed the global markets in the last one and a half years. From a valuation perspective, we are slightly ahead of fair value compared to global markets. We all believe that India has a great story, and the world is looking at India for its growth, so India will keep on getting capital. But even on a longer horizon, the entry points do matter. When you start investing, if you invest a lump sum right now, you may see that after one and a half years, your return is very subdued... It's better to stagger your investments, but at the same time, keep an eye on the market. Whenever you see a correction of 5–10%, try to use that opportunity to switch money from debt to equity at that point in time. You have to be slightly active, keep your STP for 12 months, but at the same time be active if the market falls 5–10%. Use that as an opportunity and use this lump sum at that point in time. Apart from Indian markets, we are advising our client to take some global exposure also because we have seen the Indian markets outperform the global market for the last one and a half years, and there are few global markets that are looking very attractive from a valuation perspective… If someone has very low exposure to global funds or doesn't have any exposure to global funds, we believe that it can be a great time to add them to their portfolio because you are buying at a lower valuation… If you look at the China market, they are down; if you look at the Hang Seng Index, they are down; if you look at the Taiwan market, they are all down. In the last one and a half years, they have been corrected by 20–25%. One can start investing in those markets, and an individual can take up to 10% of their exposure in global markets… We are advising clients to take a staggered investing approach in the Indian markets and, at the same time, add some global exposure to their portfolios.
Mohit, fill us in on some of the better funds in each of the categories that you advise.
Mohit Gang: So, this is not the entire list. A few of our picks would be, let's say, in the large-cap fund, passive index funds. My choice is the ICICI Pru Index Fund. On the Flexi cap front, we can go with the Aditya Birla Sun Life Flexi cap or even the UTI Flexi cap for that matter. On the balance advantage side, Tata Balance Advantage and Edelweiss Balanced Advantage are two of our picks. On the multi-asset funds, there are ICICI Pru Multi Asset, Tata Multi Asset, and even Nippon Multi Asset, to some extent. I think those are our picks in each category.
It's interesting that the Tata mutual funds are finding a place in your portfolio, especially in the balance advantage fund categories. This is the first time I've seen somebody recommend them. Why so?
Mohit Gang: I think the hot favourite in the market has always been ICICI Pru Balanced Advantage. I absolutely like that fund. But I think Edelweiss and Tata offer something different, plus the AUMs are still quite respectable in this segment. Pru ICICI is almost touching 40,000 odd crores as an AUM. It's a great fund, very neatly managed, and we continue to have large holdings out there. But as an added new allocation, if you really want to consider two different themes, I really liked the way Edelweiss and Tata are working on that front.
Nikhil, you mentioned the relative safety of large caps, some global exposure, and something else. What are the kinds of funds that people can go out and study and explore with?
Nikhil Kothari: We are looking at some multi-cap themes... We are also looking at value as a theme. That's where funds like the Templeton India Value fund have some exposure, or incremental exposure can be added there. On the global side, we are looking at a few funds like the Greater China Fund or the Hang Seng Tech Index Fund. We are looking at those global exposures. In the U.S. market, S&P 500 or Nasdaq options are available. So, we are looking at those funds as exposure to add to our clients’ portfolios. We prefer the Greater China Fund, which we are very aggressively adding to our clients' portfolios.
It's interesting that it's an Edelweiss product. But isn't that subject to a bit of volatility and uncertainty because it's so exposed to China and buying Chinese stock? I mean, the markets out there have been very choppy, to say the least.
Nikhil Kothari: Exactly. So, that’s why I am trying to say that in China, there is some geopolitical risk. The Greater China Fund gives you exposure to China as well as Taiwan and other countries. So it has exposure across the market. We recommend staggered portfolios... If you already have a sizable exposure to global funds, we don't recommend that, and if you don't have any or maybe have a half percent or 1% of your portfolio in global funds, you should start looking at that. On the global side, we are also looking at the PGIM Global Equity Opportunity Fund, which gives you exposure across the market. So primarily, these are the funds we are looking at adding incrementally to our clients’ portfolios.
Now we should focus on debt because that too has had various variables impact it in the last 12 months... Nikhil, can I start with you for somebody who's wanting to invest in debt… for somebody who wants to invest for a period of about 12 months and for somebody who wants to invest for just slightly over three years to take advantage of the taxation. So, what is it that this person can do?
Nikhil Kothari: In the debt categories, most of my exposure is going with target maturity funds, and some people who have a slightly longer horizon can look at dynamic types of funds. What I mean by "target maturity funds" is that the fund is investing in papers that are maturing in line with the tenure of the fund… We are very bullish on target maturity funds in terms of exposure when they match the client’s horizon. Apart from that, if someone is willing to take on a high amount of volatility in the short term but believes in the overall interest rate and is ready to do staggered investments over the next six months, they can look at long-term funds or dynamic bond funds.
Okay, what are the kinds of returns, Nikhil, that one can expect in the target maturity fund?
Nikhil Kothari: Okay, so currently, if you have a short time horizon, the target maturity is closing on 6.5% to 6.75% minus 30 to 40 basis points. So, one can expect 6.2% to 6.5% as the return. If someone has got 2026 or 2027 as a horizon, then they can expect a yield of around 7.3% to 7.5% minus 40 to 50 basis points. They can look at 7% pretax. So, from short-term 6.2% to 6.5% and for medium-term 7% pretax.
How are you approaching this Mohit? What are you telling your clients?
Mohit Gang: Look, I think on the debt front, there are two kinds of clients: one who believes debt is debt. They want absolute safety and the conservation of capital, and they are absolutely not okay with any kind of risk, even interest rate risk in the short term. So, for people who don't prefer to have any volatility but want consistency, even low returns are fine, then we are asking them strictly to remain on the short end of the curve and stick to ultra-short term or money market funds. That's where the volatility will be absolutely less, and they will give you a fair deal of around 6% of a return, which is roughly the YTM in that range currently for those kinds of funds.
Is this for any particular timeframe, Mohit?
Mohit Gang: Any timeframe from, let's say, one month to around a year… and even though you want to go ahead, say for one and a half to two years, it won't harm you. Yes, at that tenure, you can perhaps try to increase the yield by getting into other instruments. But yes, this is absolutely fine for anyone who wants to invest beyond a month or two months. That's on the short end. Whereas people who are okay with some amount of interest rate volatility in the portfolio… then I think what Nikhil said makes an absolute amount of sense to go with target maturity funds. You align your investment horizon with the kind of tenure the funds are offering. There are target maturity funds across the spectrum these days, right from 2025 up until 2032-33 maturity… if you really want to go for five or seven years, go ahead. You will get the indexation benefit, tax will become highly efficient, and the paper quality is absolutely clear. These are the highest-rated papers. You will have all AAA, PSU, and SDL kinds of portfolios, and the yields are very, very attractive right now. The yields in all these portfolios are somewhere in the range of around 7.25% to 7.75%, even for a 2030 maturity. So, it's a great option, but there will be some volatility next year, and people need to be cognizant of that. It won't be a straight line.
Mohit… If they are taking target maturity funds, what are the options there? From a short-end perspective, would most products be homogeneous, or are there one or two examples that you can give?
Mohit Gang: On the short end, if you are looking for April, specifically March maturity 2023, then I would rather go with a DSP Savings for a March maturing portfolio and for April 2023, the Edelweiss Bharat Bond April 23 paper. These are for the short term. On the money market side, I can go with the Aditya Birla Sun Life Savings Fund or Pru ICICI Money Market Fund. On the ultra-short term, you can pick up; actually, this is not much of a difference, but the ICICI Ultra-Short Term or an Axis Ultra-Short Term is a good option. On the rolldown of the target maturity funds, there are a plethora of options. Honestly, the names are extremely confusing for investors to remember. But I would rather go with a few thumb rules out there. Edelweiss Bharat Bond has been the most successful Target Maturity series ever done in this country. They were the pioneers who started this trend in the world of debt mutual funds. So, anything from 2027 or 2028 to 2032, you have the Edelweiss Bharat Bond series available for all the maturity years. They are the highest-quality papers with the lowest expense ratios on the market, which is extremely important when you invest in debt funds. I would suggest that, and even looking for options, you have many CRISIL, SDL, PSU, and CPSC paper combinations. These are all written down in the nomenclature of the scheme, so you can go ahead and pick it because these are all indices. The funds are just mirroring the index. They are fairly safe, and the paper quality is high, so you can choose either of them.
Nikhil, what are the kind of funds that you are looking at when you are recommending the categories that you did for your clients?
Nikhil Kothari: So basically, as Mohit has rightly said, the fund is homogeneous in terms of what exactly it offers. If, for example, someone is looking at March as a time horizon, which is five months, then one can look at the PGIM Money Market Fund or the DSP Savings Fund. If somebody's looking at June as the horizon, then someone can look at Birla June 2023 as an exposure. If someone is looking at a five- to six-year horizon, then right now we will prefer G-Sec over an SDL or PSU combination because spreads are very narrow right now. We will be recommending the IDFC Gilt Fund for 2026, 2027, and 2028. You have three options there… If someone is willing to take a slightly higher risk, they can look at 2028, and if someone wants to take a slightly lower interest rate risk, they can look at 2026. These are the three options we are looking at in terms of exposure... If you are looking at staggered investment and don’t want to take that interest rate volatility… I recommend that you go with 2032, but in a staggered manner.
What should people do if they have existing investments in constant maturity funds? Would these be homogeneous or similar to target maturity funds?
Mohit Gang: Not exactly, Niraj. Constant maturity is a different category by SEBI, and there are mostly ten-year gilts in the portfolio. So, the category is called the 10-year Constant Maturity Fund. The portfolio is fairly long-dated, which is exactly a 10-year kind of maturity… The interest rate sensitivity is fairly high in the portfolio. But if people are holding… You are almost at the peak of the interest rate cycle, if not there yet. You are at around 7.20–7.30% on the 10-year yield, perhaps at 8%. I would say that, okay, just start entering at the long end of the curve whenever or wherever you can get opportunity… You will see some good markdown impact on your portfolio as you move towards that range, and you will certainly move towards that level. There will be some volatility; however, the approval yield on the portfolio will be fairly high. It should be somewhere in the range of around 7.5-7.75% for that kind of maturity. So that's okay to hold right now. For people who are waiting for that level, anything upwards of 77.5% to 77.5% from the tenure, I would say start getting into the long end of the curve. It could be a 10-year constant maturity or even a fund like the Nippon Nivesh Fund, which has a 2042–2043 maturity. That's a 20-year kind of portfolio. This is a fantastic portfolio for someone who really wants to build a long-term debt portfolio. If you want to build a long-term, 20-year debt portfolio, go for that fund. It's a great fund to invest in and just ride the interest rate cycles as they come along the way.
Okay, Nikhil, very quickly do you want to add something before we wrap up?
Nikhil Kothari: The constant maturity fund is completely different from the target maturity fund. The difference is that constant maturity will always have 10-year paper. So, after one year, they will still buy 10-year paper, and in the target maturity fund, the maturity will keep on falling. So, in terms of risk level, the target maturity fund will have lower volatility as compared to the 10-year constant maturity fund... If someone wants to play interest rate volatility and believes the interest rate will come down, then they should look at the constant maturity fund. If they do not have an interest rate view and hold the fund till maturity, then they should look at the target maturity fund.