The last one year has been quite a ride for investors. From the highs of January to the onset of the long-term capital gains (LTCG) tax era, ensuing market correction, to the peaks of August and then again to the fall of October, it has been a roller coaster.
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However, if you have been systematic in your investment approach, if you have taken care of basics like setting goals and creating a PF plan, then surely you would have weathered this volatility quite easily and if you haven't, then well, worry not, it is never too late to start and we are always here to help.
As a part of our Diwali specials, CNBC-TV18’s Surabhi Upadhyay talks to Radhika Rao, CEO, Edelweiss Mutual Fund, Ashish Somaiya, CEO, Motilal Oswal Mutual Fund and Feroze Azeez, Deputy CEO of AnandRathi.
Watch the video here.
What an year this has been. When you do a throwback what comes to your mind?
Gupta: It has been a roller coaster but in some sense, I think for investors it has been a good roller coaster. It sounds strange to say that 2017 was a year where maybe we got very complacent about how markets are? How investments are? It is a oneway street and 2018 showed us some realities.
I think what we have seen in 2018, trouble in the credit markets, midcaps falling, single stock specific issues and this is the reality. And in some sense, it is a good reality check for investors to see have they set their goals right, have they done their asset allocation right, are they investing as per their risk profile. So sometimes a little bit of a healthy correction is also a good sanity check for us.
Maybe a necessary jolt. Is it just that because the problem is everybody is wondering if this is going to snowball into something bigger?
Somaiyaa: First things first - Diwali is about praying to and celebrating Lakshmi, so it is only in the fitness of things that you conduct the show and she starts speaking first.
This year has been a reality check, but also keep in mind that everybody seems to be a little bit under the gloom and it is just the last nine or 12 months which has actually resulted in this downdraft. If you see any well managed product like a mutual fund or any portfolio that you have even if you step back and see the last two years or three years or five years or whatever, I think the numbers are pretty much respectable even now.
So, if you have this odd point of your nine months, 12 months, six months etc. which is not gone the way you really thought, I don’t think there is anything to really worry about. It is just about keeping perspective. I mean everybody is always told to invest for a five year kind of time frame and everybody always expects that they should have a double digits CAGR. But the CAGR concept is misleading because people expect it should be double-digit every year. But if you see the past 20 years once in every 5 years there is this downdraft and then things kind of even out.
You are right that when the going is not great everybody extrapolates that into the future and then people start thinking that okay is it going to get worse. Now that is difficult to call. But I think the most part of the negative is behind us. That is what I would hazard a guess.
Your initial thoughts as well and what you have seen over the last several months in terms of investor behavior, retail investor behavior? Have people come to you saying why I have more money, should I invest the more the market is falling or people coming and saying that I don’t know, already sitting on gains should I book out? What is the pulse like?
Azeez: I think we are gradually moving towards a more educated investor that is for sure. I think whenever you go through a roller coaster, the roller coaster ride is worth it as long as you take away something. If you again forget what your learnings are then it is pointless to actually have gone through this pain.
We as advisors are duty bound to summarise the learnings of what it is. Now, for example, we tell our investors, at least the people we interact with, that looking at a rear view mirror and investing is not a good idea. In 2013, when the Nifty midcap P/E was 14 people weren’t investing. At 46 midcap P/E they were still investing so you can’t just be carried away with the last one-two year performance. I think that is one very important learning.
Second, I think an important learning is not relying on rating agencies to make debt investment decisions. As long as you can take that away and not forget it then it is good. So, I think the people are still interested. I think people don’t have a choice but to acclimatise themselves to this volatility.
Now this whole issue about rating agencies and whether that can be a benchmark specifically you also look at the fixed income side and Edelweiss has several funds there as well. For a retail investor who is just warming up to the idea of moving beyond a fixed deposit, this has come as a bit of a jolt. What should one be doing because as Feroze Azeez said that even if you try and be very smart and try and look at what sort of security is this credit fund is investing in and as an investor all you understand is AAA. AAA means it should be good and then there comes an event and a default. Then how do you ring fence yourself, how do you protect yourself and what advice would you give?
Gupta: There are two parts to this. One is a part about the credit markets and which I will address. The second and more important part is what should a retail investor do investing in fixed income. My advice to retail investors has always been that if you are staring with debt, debt is not a place to get “cute”. You are doing debt for fixed kind of returns so per se. So if you don’t have that risk appetite and if you don’t understand debt and if you find it scary, do some of the shorter duration kind of funds. There are lots of categories, there is low duration, there is short-term, do some of that.
If you are venturing into credit then know that credit risk exists and this is not an isolated event, this will happen every year. I mean the banking industry has the best bank in the country. It has 2-3 percent NPA so it is unlikely that the credit fund industry will not have events like these. If you are not prepared for it, stay away.
What happened in the month of September also taught us that the equity market is not insulated from what is happening in the credit markets. I mean there were days we saw stocks fall 50-60 percent suddenly. Do you think these credit market rumbles, will they still flow into the equity market or at least from that stand point we have seen the worse?
Somaiyaa: We have seen a good part of the worse already. But where it impacts is that let us say that non-banking financial companies (NBFCs) are playing an important role in fulfilling the whole credit requirement and if there are issues whereby they are not able to raise liabilities and in fact, they have to shed their asset base. What happens is that there will be certain segments of the consumption also like there is consumption which is leveraged consumption like real estate or expensive purchases like large vehicles and cars etc... which depend on funding from NBFCs.
Right now what is happening is that the market has kind of painted everything with the same brush and when there is a fall, people are not discerning enough. They just want to sell everything and run away. So it will take a couple of months or maybe a quarter for people to realise this is indeed impacted and this in not impacted. Here there is an overreaction and here there is a no need to react.
So things will take couple of months to settle down but I think we have already seen the worst and we know which are the impacted parties and how things are playing out. People are now just being circumspect about figuring out if there is any further collateral damage. I think that is the point.
Your view on this whole confusing world of fixed income funds and in this environment the advice that was being given at least till September was that three-year horizon tax efficiency, go and pick a nice accrual fund, even if it is a credit risk fund as they are called right now. Now with this IL&FS event is that advice still valid?
Azeez: I think it is even more valid. Rather than picking up ratings, a fund manager needs to be picked on the debt side. Nobody picks a fund manager on the debt side at least equity fund managers are far more popular and investor at least knows who the fund manager is.
I think on the debt side couple of fund managers have done wonderfully well. There is one which is looked at, one thing which people look at is ratings. When I managed treasury for example – you have something called Z scores. Credit risk funds have better Z scores, which is a good measure of credit risk so Santosh Kamath, for example, Templeton has done a wonderful job. I am trying to summarise is that don’t shy away from debt funds, choose the best fund managers who have displayed capability of not just going with the herd mentality but have the courage to pick up credit companies with a lot of analysis.
In that case, 2-3 names that come to your mind?
Azeez: Franklin Templeton India Income Opportunities Fund, ICICI Prudential Regular Savings Fund and Reliance Regular Savings Fund. All these three portfolios have been designed keeping a lot of analysis backdrop.
The question on everybody’s mind is what about the market, is the bottom here, have we seen the worst. You did say that at least the worst of this seems to be priced in, however, there are still people who are shying away from entirely deploying their money right now, what should be the strategy?
Somaiyaa: There are certain event risks, which everybody is watching for. One is like you have been describing there are certain credit events in the market and people want that they should get ironed out and you don’t hear much more flutter about all of this. So that is one thing that has to go by in the next month or couple of months.
The second is that there are state elections then there is this whole thing about Iran sanctions and oil prices and all the inter-relations. The fact is that in the next 45 days, we have a fair number of events. What any mature investor should keep in mind is they should let these events pass.
I don’t think that you should perpetually be sitting on cash because the market doesn’t make any announcement before and these things can turn very quickly and oil prices go down another $5-7 per barrel and if there are a couple of other surprises. Anyway if you see the result season has been reasonably good. There are some concerns about sustainability but it is not that bad.
So I think it doesn’t take time for sentiment to change. So I think if people are waiting somewhere in this quarter maybe in the next two-three months, that is the maximum they should spread it out.
Gupta: Firstly, it is impossible. I have realised in my career to answer this question, what about the market. I don’t think anybody has an accurate answer to this question let alone me.
To echo what Aashish Somaiyaa said, I would say that things are going to be volatile for the next three-nine months but the truth is that the markets always have a collection of known events around them and then there are unknown things that nobody can go ahead and predict.
I think for people looking to deploy equity money is this a better time than it was a year ago when people were very excited, it is probably is because valuations are looking better and corporate earnings are starting to pick up.
I think what has worked for a lot of high networth individuals (HNIs) and, especially retail investors is staggering out your investments because quite frankly nobody can time the market whether you choose to stagger them out using the time tested STP or SIP route, whether you choose to balance them using dynamic asset allocation funds, which is another way to get at the same exercise, I think staggering your investments out has always worked well and that is my constant advise because you cannot time the bottom. Yes, it is a better time than it was certainly a year ago.
How are you advising clients to go about their deployment and also there would be people who are wondering whether there is some kind of rebalancing required at the moment, should the fixed income component be increased just that little bit or should the equity component be now jacked up because you are getting lower prices, how are you looking at it?
Azeez: Point one is – I think equity has enough and more data to tell you that a 10-15-20 percent fall is a characteristic of equity. Is that acceptable risk? To my mind, that should be an acceptable risk. So 60 percent goes into equity, 40 percent goes into debt.
If the used good vehicle or selection after choosing the right form of asset, earning 12-13 percent, to my mind, is not going to be an upheld task, especially when debt is supporting the cause of absorbing risk from equity. Debt always absorbs risk from equity. Use both these assets in complementary in nature.
I am going to now ask you to put your money where the words are. If you were to invest a Rs 100 of your own money across the universe of your funds, what would you go and pick? I am talking about someone who has a medium risk appetite, middle-aged, medium-risk appetite investor – should it be more tilted towards midcaps and smallcaps because that is where the bargains are, should he be a little more sedate and stick to more of the largecaps, what would you do?
Somaiyaa: One is this is like a personal bias so I don’t have any fixed income investment. I have only equity investment and if I have to make an investment for five years, it is a reasonable timeframe. If I have to allocate money today over the next couple of months, it would be midcaps because I generally believe that any five year time cycle – we have done this data, you divide the market into top 100, next 200 and then the long tail and say that the 101 to 300 roughly is the upper end of smallcap and the midcap space.
You take any five-year time bucket, the probability that some stocks from this bucket will go on to become largecap, probability that some stocks will remain in this bucket but give you a decent return, these probabilities are as high as 40-50 percent if you add up both of these.
So I think any five-year timeframe in a country like India -- we are living in a country where insurance companies are in midcaps -- the largest asset management company is a midcap. Banks are IPO'ing in that space, a lot of the banks are in that space, most consumer durable companies are midcap. So I think we have a long way to go. If you don’t get caught up with what happened in the last six-nine months, I am perpetually somebody who thinks that any five-year investment at any point in time, people should have 50 percent of their money in midcap.
For the readers, I would like to clarify, when I say midcap, I genuinely mean – my definition is anything which is Rs 8,000-9,000 crore market cap up to Rs 30,000 crore market cap. When I say midcap, I am not saying smallcap because the probabilities and risk return combinations are very different.
What would your own bent of mind be if you were looking at personal investments right now, which are the one or two Edelweiss funds that you will go with?
Gupta: I am your classic moderate risk investor for two reasons, one I don’t like large drawdowns, the financial services industries, so life is volatile enough. Secondly, I am reasonably lazy and I don’t have time to do this market timing and asset allocation, which is a problem. So I like to park money in dynamic asset allocation or balanced advantage funds.
On average, that means I have 60 percent equity exposure and 40 percent good quality fixed income exposure that can be 30, that can be 80 and that equity exposure typically is multicap equities in nature. So multicap - I think - gives you the blend of midcap and largecap, I think there is enough alpha generation.
If you went down pure largecap today, you don’t capture some of the midcap opportunities that Aashish was talking about but the more important thing is I don’t like to do this exercise of should I be 40-60 today and 70-30 tomorrow and 80-20. I like it to be done automatically for me, I like that discipline to be maintained and usually in this category, I see that over a three-year period, the chance of you having material negative returns is very slim. So that makes me happy.
Your top funds that you like at the moment?
Azeez: Last Diwali, Securities and Exchange Board of India (SEBI) brought a circular which brought two categories to my interest, very high interest because I think the disparity between largecap and midcap is reasonably large at different points in time. Today Nifty P/E is about 24, some midcap index have a 40-45 P/E, so that is a large disparity. So I would leave the mandate of moving between midcap and largecap as a retail investor if I have to be one. Then what happens is then the fund manager is able to move between these two. That is point one.
The other category of immense interest is the focused equity funds, which are now carved out in the mutual fund basket, which replace PMS very well to my mind. So I would use a focused largecap fund because largecap is low on risk, you concentrate, bring up the risk marginally to get the higher return.
So to answer the question, point one is look at multicap funds, if you are not able to decide, look at focused equity, only largecap focused equity. If you want me to name some of them, at least in the multicap space, I would definitely look at Kotak Standard Multi-cap Fund, not a very good performance for the last one year but I think it is very well poised.
In the focused equity side, I would definitely look at Mrunal’s ICICI Prudential Focused Equity Fund which is 13-14 stocks, I think he will go up to 16-17, can give you that 1-2-3 percent higher IRR with not too much of a risk different than Nifty.
Your views on gold?
Somaiyaa: It makes sense to have gold and diversify but my guess is that people do not see it as an investment. I think everybody in their family has enough and more gold but they do not see it as an investment at all. If I say that yes, you must have gold in your portfolio because it diversifies and because when the risk in financial markets is very high then gold is a good fallback.
I can say all of that and it is a fact but the reality is that people are never going to view gold as an investment. So how do they view it as a diversification at all. Therefore, keeping that in mind then people are overinvested in gold. It is not if the risk perception goes down you are going to sell your gold and buy equity at the right time; you are not going to rebalance that. So we are perpetually just buying gold. It’s an exaggerated segment but one reality is also that as generations change – my grandparents might have bought a lot more gold and then my parents and then me. So a lot of it is also getting handed down.
Your thoughts on gold as well as real estate because now there is a talk of an impending real estate correction or crash as some people like to use the word because of issues in the NBFC sector and what happened in the credit market. Do you think that these assets classes will also be in attention in the coming one year and therefore what advice would you give to investors?
Gupta: There are two-three things. One is that you have to separate very clearly what is investment and what is consumption and with physical assets we always have the risk.
Ashish spoke about gold. The same is true of real estate. If you buy a home for consumption you are not going to sell it just because it’s risen in value. So you have to separate what is a financial asset and what are investment assets versus what is a consumption asset. My bias has always been towards financial assets because of the element of transparency and liquidity.
I think in times like this the one thing that we realise is that liquidity is very important; obviously, the real estate market has a long way to go in terms of providing that kind of transparency also. Even with gold just to add to what he is said – you can look at gold, in fact, I have always believed gold should be 5-10 percent of people’s portfolio from diversification basis but do not look at it because it has done well over the last year. That is your past looking bias that we just talked about on the show and if you have to look at it as an investment vehicle then look at financial forms of gold; physical gold is not the most optimal way to make an investment.
Third, as diversifying asset invest in international funds. Given what is happening to currencies; why just look at Indian equity markets, why not explore international equity markets. So diversification is certainly very valuable.
Your thoughts on the subject as well and across other asset classes. Would you recommend anything right now and if you go back to Rs 100 of incremental money that I have as an investor to investor, how would you break it up and specific call on real estate. There would be pullover, probably thinking that all time crash that I am waiting for in the last ten years maybe that is coming so should I look at parking some money in real estate investment when that time comes?
Azeez: We have been negative on real estate for the last five years and we continue to be negative because it is overshoot itself; residential metro real estate because everything in the country is real estate, right.
So you have to be little more specific; metro residential real estate is a complete no-no. I think it will go through a time correction of at least three-four years because it will take another 10-15-20 percent drop because if liquidity dries up and there are about 8.5 lakh apartments to be sold with an average price of Rs 78 lakh in six cities in the country, according to latest statistics.
The last statistics which I saw was in 2016, there were 42,700 people who have filed taxes more than a crore - that’s the size of our tax base and those are the guys only who could afford Rs 1-2 crore apartment. So the point is real estate is something which is very scary; land and rest of the commercial could be a different ballgame but most investors end up buying residential property.
On the gold side, I think you should have no gold unless you have any foreign objective to meet. It could be a child’s education because in the long-run you have to hedge your currency. If you have your child’s education abroad, if you are a person who is fond of travelling then that portion of money should be in dollar terms so that you do not escalate prices significantly beyond inflation number which the currency has the potential to infuse in your portfolio.
First Published: IST