The Mutual Fund Show: What's Better Amid Uncertainty — Value Or Growth Funds?
Should investors consider value or growth funds amid uncertainty? Here's what financial advisers suggest...
Amid market volatility due to macroeconomic challenges, rising interest rates and inflation, investors may wonder whether to consider mutual fund schemes that invest in value or growth stocks. Financial advisers, however, say both are integral to the portfolio.
A growth stock is a momentum stock, which was bought for Rs 100 but is expected to rise to Rs 200; while a value stock is bought at Rs 50 though its intrinsic value is Rs 100, Nisreen Mamaji, founder, MoneyWorks FS, told BQ Prime’s Niraj Shah.
“Typically, when the markets are greedy, growth stocks are in favour, but when investors are fearful, value investing will be more in line with the sentiment,” Mamaji said.
According to Yogesh Kalwani, head-investments and family office at InCred, investors don't have a specific fund if they look to implement a “pure value style”. “The biggest dilemma for an investor is there's not too many purist value fund propositions on the street.”
Kalwani terms “a growth strategy” as something which has paid off in the long term. He admits that currently, there is “a lot more blend in the mutual fund availability and options available for investors”.
According to Mamaji, mutual fund options are “always a blend because you can't have value without growth”. Her top recommendations are the ICICI Prudential Value Discovery Fund, which has performed well in the three-year, five-year, and 10-year segments.
The UTI Value Fund, the Nippon India Value Fund and the L&T India Value Fund are also good options, as they outperformed in the 10-year category, though not as well in the three-year and five-year categories, Mamaji said.
InCred Wealth’s top picks are the SBI Focused Flexi Cap Fund, which has a long track record; and the UTI Flexi Cap Fund, which has seen some underperformance over the last six months, though Kalwani remains positive about it.
“As a blend of a style and growth at a reasonable price, both these funds tend to deliver returns over a longer period of time and across market cycles,” he said.
Are Smaller Fund Houses A Good Bet?
Certain funds belonging to smaller fund houses are getting higher ratings and ranking across equity categories.
According to Kalwani, InCred Wealth does not consider funds from houses which have assets of less than Rs 15,000 crore.
He recommends the PPFAS Mutual Fund's Parag Parikh Flexi Cap Fund, which has around Rs 20,000 crore in assets. “It is growing rapidly and also investing in the equity side of things, and the fund has done extremely well.”
The PPFAS fund is also Mamaji’s pick among the smaller funds. “The beta over three and five years has been low—its less than one—but the alpha over the benchmark indexes has been 8.21% for three years; for five years, it’s been 6.47%; and the three-year performance has been 22.69% for Parag Parikh.”
Watch the full conversation here:
Edited excerpts from the interview:
There was a chart that I tweeted four days ago which showed that despite the small U-turn that yields generally have taken, value funds and stocks are outperforming growth stocks thus far in 2022. There is a distinct tilt on the global scale towards value as opposed to growth. Now, there are funds and fund houses which distinguish themselves as ones that focus on quality at any price or quality at reasonable price or value. Does it make sense from an Indian mutual fund investor’s perspective to look at funds which might be doing so?
Nisreen Mamaji: Let me explain the difference between growth and value. Basically, a growth stock would be a momentum stock, which you have bought at Rs 100 for example, but you expect it to go to Rs 200.
This could happen because of your company doing well, because of market reasons, and also because there's an expectation that the market sentiment has valued this company at a higher rate later on. That's why it's called momentum. You are expecting the P/E to be in your favour.
A value stock vis-a-vis that is something that you buy, say at Rs 50, but its intrinsic value is Rs 100. So, it is out of favour right now, and that's the basic style of investing.
Typically, when the markets are greedy, growth stocks are in favour, but when investors are fearful, at that point of time, value investing will be more in line with sentiment.
Now, the reason why this happens–currently it's happening–is because of rising interest rates and inflation. That is leading to a spike in bond yields and the last 10 years has proved that there is a positive correlation between rising interest rates, rising bond yields, and the performance of value stocks. So, growth stocks will normally do well in a falling interest rate scenario, and value stocks will do better in a rising interest rate scenario.
Right now, what has happened is till mid-2020, there was an influx of money here, trillions of dollars were put into the system, and that's why the growth stocks, the momentum stocks took off. But right now, we are facing a time when this money is basically leaving the system and that's why we feel it's a good opportunity to invest into value stocks.
Now, 54% of the MSCI India Value Index comprises right now of Infosys Ltd., Tata Consultancy Services Ltd., Hindustan Unilever Ltd., Maruti Suzuki India Ltd., Tata Steel Ltd., Mahindra & Mahindra Ltd., and Bharti Airtel Ltd. So, these are the kind of stocks which would be considered as a value stock.
Also, another point in favour is that the MSCI India Value Index is trading at a trailing P/E ratio of 17.27 times compared to the 10-year average P/E of 29 times So, that's another reason why we feel that value investing is the flavour of the current time.
Yogesh, are there options available for an Indian investor to choose funds which might have that value style? Does it make sense to look at value-oriented funds as opposed to growth-oriented funds?
Yogesh Kalwani: The way we look at the growth and the value contour is that growth is a lot more about earnings also while you look at valuation parameters compared to the historical parts, etc. Now, the challenge in India is that every investor will classify various stocks in a different manner. Some may look at it as a growth stock, some may look at it as a value stock.
The key point or the dilemma is the lens or the way you are evaluating a stock, or you have to take some relative basis–either a historical, or the stocks’ past performance, or relative peer group, etc.
So, it's very difficult to classify stocks specifically into growth or value, and the stocks also keep changing from value to growth depending on how well they have done in the recent past.
The sense which we have is the style of a fund manager to adapt from a growth and a value parameter perspective. We haven't seen a distinct style emerge, so there is a blend.
Fund managers do have stocks in the portfolio which are typically having a growth visibility and an earnings consistency, and they look at adding that in the portfolio. Certain stocks which they feel are reasonably valued and also hold a promise of a revival of growth or a potential rerating is what gets added. So, you don't have a fund if you have to implement a pure value style, or you don't really have a specific fund which plays out a pure value side.
We have seen a lot more blend in the mutual fund availability and the options available for investors.
To our mind, a growth strategy is a strategy which has really paid off in the long term because the factors that investors look at is anything which has a consistency in growth, visibility of earnings growth. That typically reflects in a stock market performance, and hence, the mutual fund return performance.
There are value traps wherein the company sometimes underperforms and then you land up not delivering–not even the results on the corporate earnings side, not even the returns. So, our preference remains on the growth style, but the biggest dilemma for an investor is there's not too many purist value fund propositions on the street.
Nisreen Mamaji: I can add that it's always a blend because you can't have value without growth. If you ask for recommendations, I would recommend the ICICI Prudential Value Discovery Fund, which has done well in the three-year, five-year and ten-year segment.
Also, the UTI Value Fund, the Nippon India Value Fund and the L&T India Value Fund, which have outperformed in the ten-year category, and not so much in the three and five-year categories.
These are the top recommendations I would be offering if you ask me for value mutual funds with the blend of growth.
Some people find value in growth, and Nisreen is tilted towards value getting an uptick, and there are funds that can combine value and growth but largely fall on the value side. Yogesh, if you are on the opposite end, are there high growth funds that you reckon or fund houses that chase growth stocks but which might be good investments?
Yogesh Kalwani: The way to look at it is growth at a reasonable valuation. That itself is a concept called GARP–growth at reasonable price.
If you look at fund managers, typically, they have a more balanced approach–whether the companies are growing, stocks have visibility and earnings growth, and they are priced appropriately. They are not overpriced, they are reasonably priced, and hence, they become a part of the portfolio.
Two such funds which we like–one of them is SBI Focused Flexi Cap Fund–we feel they have done well and it has a long track record and follows this philosophy in a great way.
The second is the UTI Flexi Cap Fund. While there is some underperformance in the last six months or five month period, we feel that it will overcome it. That’s largely due to a healthcare allocation which has not played off for them.
But, as a blend of a style and growth at a reasonable price, both these funds tend to deliver returns over a longer period of time and across market cycles.
Let’s talk about passively managed ELSS schemes. We have urged everybody to not think of ELSS schemes only in the month of January, February and March in order to save tax. Even if you want to do it only for saving taxes, start thinking about it from the first few months (of the financial year). There is a circular that has come out and there is an option possibly very soon of passively managed ELSS schemes making a beeline into portfolios. Yogesh, what are your thoughts on this?
Yogesh Kalwani: India is two worlds on the passive and active side, if you look at market capitalisation.
Take the last five-year track record–calendar year wise track record of various capitalisation breakup funds–say large cap, mid cap, and small cap as three distinct categories. The large cap funds, if you look at the last five years, on an average only 34% have outperformed their benchmark indices. So, there is a lot more difficulty to beat the benchmark. Very well researched, the category has not much differentiation. Good companies perform better, etc. So, out there 34% of the funds in the large cap category managed to outperform the indices.
It looks attractive on the mid cap and small cap side. That's where you see 54% of the funds that outperform the indices over the last five years. If I take it on a year-on-year–calendar-year basis rather than a point-to-point basis–you have seen them outperform across market cycles. And that's where it reflects that India is a market which is a lot more bottoms up.
The fund managers are able to identify ideas on the mid cap and small cap sides much better. So, the passive strategy on an ELSS is if an investor is looking for a pure large cap play.
Now, coming to what ELSS is as a category, ELSS typically has a mix. If I take a broad industry level mix, it's 65% large cap and 35% between a mid and a small cap.
And you have various funds–you have funds which are focused on mid and small, you have funds which are focused on large caps. So, if an investor wants to be a little more conservative than a passive strategy, which means a large cap-oriented strategy makes sense for them.
But if he wants to look at mid cap and small cap, which is the best for a three-year time horizon which an ELSS has, then an active managed fund makes more sense. So, that's a segment even the active fund managers have outperformed the benchmark over multiple years.
If you are a type of investor who wants to invest in a large-cap ELSS scheme, then maybe the passively managed ones might be a great option, but otherwise a Flexi Cap or funds focused on mid caps and small caps in the ELSS category might be great bets as well.
Nisreen, there is an ease with which there will be an ushering in of some of these schemes as well. Are you in the same camp as Yogesh or does your opinion differ?
Nisreen Mamaji: Not entirely. Basically, the caveat is that you can either have an active fund or a passive fund.
Most of the existing fund houses already have active ELSS schemes running. So, this opportunity is only for the newer fund houses maybe to introduce a scheme.
Secondly, their allocation has to be from the top 250 market stocks. So, that will basically be large and mid cap only, because it can only comprise top 250 companies in terms of market cap. The indices will be the Nifty 50, Nifty Next 50 or the Nifty 100. So, it will be basically large and mid cap.
Now, the issue is that in the last one year, less than 40% of the active ELSS funds have outperformed the BSE 500 index. And in the three and five years segment, it's less than 30%. So, there is an opportunity perhaps for the passive funds. One is obviously because of the lower costs. For example, in the Axis Long Term Equity Fund, the expense ratio is 1.68%, but for Axis Nifty 50 Index Fund, it would be 0.4%.
If you want to enter an ELSS fund, and the cost is an issue for you, then definitely the passive funds have a role to play. Also because the active funds at this point haven't really outperformed the BSE 500 total return index.
So, if you want to judge a fund even on that basis, then there is an opportunity for a passive ELSS fund at this point. And the category itself has delivered an average return of 12% on a three-year basis, and 15% on a ten-year basis.
Could it be that some of the fund houses which are actually not focusing on the large caps might actually have given better returns and might be a part of that 60%, which actually outperformed the corresponding benchmark?
Nisreen Mamaji: That’s very fair to say. That's absolutely possible. So, it's a mix of both. Obviously, when you are paying for an active fund, the cost is going to be higher. Cost should not be the reason that you are selecting the fund in the first place, but for an investor who is looking at that, at least the choice is available.
Let the choice be of the investor’s. But as I said earlier, most of the fund houses which have been running for a long time already have an active fund in place. So, they will not have this opportunity of introducing a passive fund. Possibly, the newer fund houses have this opportunity, and if they give it, at least we have a bigger array.
Would you believe that as and when some of these new passive funds come in with very low expense ratios, they might be a fighting alternative to some of the existing large cap oriented ELSS schemes?
Nisreen Mamaji: They can but on the other hand, if they are newer then it's very difficult for us to gauge even their processes, their fund managers. So, on what basis can we recommend? With the new fund houses introducing this, we don't have any historic figures to decide. There has to be some reason for us to recommend. I would prefer to wait and watch because if it's a new fund house and a new scheme, then it's not appearing anywhere.
Yogesh, you seem to be tilting towards funds in general which might have a bit of a flavour at the mid cap and small cap and in the ELSS category. Would you recommend people should look at some of those kinds of funds from the ELSS category?
Yogesh Kalwani: Yes, absolutely. ELSS is a perfect time horizon for equity investments. So, while you are doing it for tax reasons, ideally all equity fund investments should be three years plus. So, three, five year plus, this is where you have an ability to lock in and you don't really look at this part of your portfolio for a very long period of time. Hence, investing in a little more mid cap and actively managed fund area will pay off is what we feel.
We did a show with Crisil on their rankings. A bunch of funds which were ranked number one across equity category were from fund houses which are in the stages of nascency. The fund houses themselves are new or are small. The schemes don't have a very high AUM. These are getting ranked higher, not just because of the returns that they are getting because CRISIL has multiple parameters to that. I see that happening in a bunch of other ratings and rankings as well.
I am using the names arbitrarily but Quant, IDBI, PGIM–which are all smaller houses, the schemes are smaller. Are these guys doing something right in order to get ranked higher, which is not just a reflection of the performance? Do you like any of these?
Nisreen Mamaji: Actually, we do. For example, in the Parag Parikh Flexi Cap scheme, the AUM of Parag Parikh itself is about Rs 23,000 crore, but the Flexi Cap fund is about Rs 21,000 crore. Parag Parikh will probably come in the bottom end of the spectrum if you are looking at just AUM, but it's done very well. The beta over three, five years has been low–its less than one–but the alpha over the benchmark indexes has been 8.21% for three years; for five years, it’s been 6.47%; and the three-year performance has been 22.69% for Parag Parikh. So, we have been including that in the Flexi Cap allocation.
Another one that I like is the Mahindra Manulife Multicap, it's called the Badhat Yojana Fund. The AUM of the fund house is about Rs 8,000 crore. The three-year performance is about 20%. And it's following the Multicap SEBI regulation to the hilt, and its performance is also really decent. Again, the beta has been less than one over the three and five-year segments, alpha over the benchmark. So, I have been including that. Our team has been definitely recommending the Mahindra Manulife Badhat Yojana Multicap Fund.
And another one that we like is the PGIM India Mid Cap Fund. The mid cap over the three-year, five-year, ten-year plus categories and the performances have been outstanding.
I follow their Morningstar advisor workstation to a large extent. So, we look at the asset allocation, at the performances, and all the four Ps, and it's consistently topping the charts.
So, these are three of my favourites.
Parag Parikh has this hindrance of not being able to invest in the global side. Is that a pickle and would you therefore want to wait it out until the permissions get revised?
Nisreen Mamaji: So, for the SIPs they are hitting the targets for the international sectors. But, according to all the reports and information that we are receiving, this is probably going to last for another two to three months.
At this point, we would just wait and pause. The SIPs will continue once this hindrance is lifted. So, we don't have to do anything actively in terms of pausing and restarting. We will continue as planned, even if the international component is on pause right now.
Would you still advise people to continue investing in PPFAS or should they take a pause and wait for the limits to get revised?
Nisreen Mamaji: It's an automatic pause as of now.
But from an investor's perspective, the investor can still invest in the PPFAS schemes?
Nisreen Mamaji: We will continue with the investing.
Yogesh, are some of the smaller houses nimbler? Are they able to do something that the larger houses are not, or is it a function of the AUM? If you like some of the smaller fund houses and the smaller themes, which are those?
Yogesh Kalwani: Firstly, when a fund is of a smaller size, they are a lot more agile on the portfolio because they can move in and out of stocks opportunities with a lot more ease.
As the fund size increases, the AUM increases. That's when you see a cautious approach by fund managers to exit the entire position or because of impact costs, the liquidity in the market, various factors. So, the best way to analyse the performance of a fund is when you start looking at them, how they are doing after they reach some larger threshold sizes. So, that's when the performance really shows up. And that's an apples-to-apples comparison with the bigger and larger AUM funds which are there. So, the challenges of a larger fund and a smaller fund are different.
Hence, you do see a lot more differences on the return side and that can really amplify in a shorter period of time when the markets are volatile. For a smaller fund AUM to sit on a very large component of cash mid-month is quite easy.
Now, our philosophy is to take a step back and go macro wherein the way we look at it is that for an investor to look at any equity fund house or equity manager, they have to first look at the ability of the AMC, the asset manager to attract talent, build and invest in an equity team.
If I look at 40 plus fund houses which we have in India, how many of them are really Rs 10,000 crore and above in equity assets or Rs 15,000 crore and above in equity assets.
So, those are the set of mutual fund managers or asset managers who have the ability to invest in equity fund management, team, investments, analysts, trading systems, compliance regulations, etc., far higher than smaller fund houses with a few thousand crore worth of assets.
We have kept a cut-off of Rs 15,000 crore and above. There are still 20 plus fund houses. Above that threshold of Rs 15,000 crore is growing rapidly. So, the biggest one will be Rs 1.5-2 lakh crore. So, that's a difference. So the 20 fund houses which have Rs 15,000 crore and above AUM in equity assets across is the focus area.
Parag Parikh features in Rs 20,000 crore of assets. That’s also our choice in a smaller fund house, relatively. It is growing rapidly and also investing in the equity side of things, and the fund has done extremely well.
So, you are just completely avoiding the smaller houses per se, as things stand right now?
Yogesh Kalwani: Yes, the reason is because the ability for them to attract quality fund managers, retain talent, etc., is a lot more difficult than the bigger ones or a fund house which has scaled up.
Nisreen Mamaji: I would second that because we have Taurus, Navi and ITI. Those are the ones that I would be a little scared to recommend until the processes and the research and analyst team, and even the sales and distribution team is in place because that's the person that we need the most. The sales and distribution is the one that we depend on. So, unless they have the entire team in place, especially the fund management, I would be wary as well.