The Mutual Fund Show: How To Choose The Right Scheme

Prableen Bajpai: Niraj, a very tricky one to answer because I think the risk appetite keeps changing with the market conditions and I think at the times we are currently in, a lot of people also tempted to start investing and make the returns that they are seeing already in the markets.

But in nutshell, I think what is important is that you identify your goals first. So, once you have identified your goals, and you have listed them down, I think that gives you the duration, the time horizon that you have on hand and I think that enables people to sort of chart out that ‘okay, for a specific goal I have the next five years for let's say retirement, I have 15 years’. So, I think that can broadly then help them decide on the allocation that they want to have because I think a lot of people don't know themselves and what sort of risk they would be comfortable with.

That's the ground reality and at the end of the day, I think the objective is to be able to meet your financial goals. So, I think if you have the time horizon correctly measured, then it's much easier for any investor to decide on the right allocation for themselves.

Bharat Pareek: I agree with her, see the two core of asset allocation and the risk appetite is about the time horizon and the financial goals and as she rightly mentioned, when markets are actually down and 5-10% lower, everybody becomes risk averse and when the markets are flying, everybody wants to chase it and they become risk takers and I think most important part the way to define it is that at what risk you can sleep with, not what risks you can take.

So, it's important to understand how much you can sleep with and if you don't have that anxiety of that position, or that kind of an asset allocation, I think it's the right asset allocation or the risk appetite.

For we at ICICI Securities Private Wealth, we normally tell our clients to do a three-part portfolio allocation rather than jumping into an asset allocation and just doing the risk appetite calculation, because you will say 60-40 is good, 30-40 is good and market will change your portfolio allocation will change.

What we say is you do some part of your capital which you want to preserve, keep it in your preservation portfolio, there your return post tax should be better than inflation and you should be happy with that and hence you should not get any anxiety with that particular portfolio.

A large part of your portfolio is your core allocation which you are trying to generate, say you know your economy is going to grow at 11% CAGR and you are talking about a 10 to 15% CAGR kind of a return. Have a very well diversified good portfolio which will generate 10 to 15% return obviously, it will come with volatility, but you know that okay, there will be a period of volatility but it's not going to eat away into my preserve portfolio and I am not going to get really anxious about the loss in my portfolio and hence, you will not make those impulsive decisions and do some correction in the portfolio which in long-term may hurt you.

The third part is if you really have that additional capital, then you do that alpha generation, take higher risk portfolio whether you are taking small-caps, mid-caps, private equity, but the idea here is that you have those bucketing done. Make sure that you don't criss-cross each other, don't relocate portfolio just because markets are moving. Just maintain your asset allocation. Just don't move the money around.

Prableen Bajpai: In such a case, I feel that one thing which needs to be understood is that let's say, the investment is being done for a goal and let's take a 15-year horizon. So, if a person is comfortable with fixed income, okay, fine, you are going to save for your child.

Let's say you do a Public Provident Fund and you're putting that Rs 1,50,000 a year and fifteen years later, you have a corpus of Rs 40 lakh. Is Rs 40 lakh going to be enough? That's the first question and so the person has to understand the maths that okay, then you will fall short of probably the goal that you are trying to achieve.

I don't think that changing risk appetite can be an overnight exercise, it only happens gradually and so maybe to start with, you start taking a limited exposure towards equity because with the same investment with about 11% returns, I think, which is a very standard return that we take for the markets the person can actually achieve about Rs 65 lakh.

It's a difference of Rs 25 lakh for the little additional risk you take. So, let's go with a balanced approach here. Let's say you take about 60% of fixed income and you take the rest 40% in equity, who still get around 10% returns, which should not be too uncomfortable like Bharat mentioned. That fine probably that is something that you can sleep with, and that can be done over a period of time.

So, if you have the horizon, gradually you can move from one asset class to the other as comfort develops, and this is what we call the familiarity bias. People are so comfortable with a certain asset class that it really takes a lot of effort for them to break those biases and I think a lot of hand holding as well.

So, for them to begin with equity is equity, even if you are giving them multi-asset, even if you are giving them a balanced advantage. There will be dips, so there is no clear-cut solution. They have to understand that if a goal has to be met, what is the requirement if it can be achieved with a total fixed income portfolio, well and good. If not, then those additional steps have to be taken to move into equity.

Bharat Pareek: See, whatever it is, right, it's as if it's a high-risk taking guy and I am sure all of us believe that we are high-risk taking guys. But when those things come may not work.

When we interact and we see these kinds of clients, we normally prefer a diversified portfolio with a higher tinge of small-cap, mid-caps, the strategy in terms of the fund manager which we select for a client like these, is actually where the changes happens, they will see more aggressive fund manager in their portfolio, which will basically will be able to provide them that higher alpha and also provide a higher beta to their portfolio, but at the same time, we will prefer to have a risk mitigant to them.

So, every portfolio investor will have a micro risk, a macro risk and a fund manager risk. We will diversify these three risks into equity only. We try to see that they are growth-oriented portfolios rather than value-oriented portfolios, but they are not growth at any price, kind of a portfolio.

So we will do a more diversification in those portfolio construction also, but we will try to make sure that it is just because he's ready to take a risk doesn't just end up taking one or two funds with a very highly concentrated portfolio and really create a too much standard deviation or what we call too much of volatility in the portfolio and diversified portfolio, but maybe a growth orientation and little bit more of a small and mid-caps. 

Bharat Pareek: See, in a portfolio construction, there is a strategic allocation and there is a tactical allocation. Thematic are part of your tactical allocation. It means that maybe 10%, 15% or 20% of your portfolio is tactically located and tactical allocation is where we do play theme.

So today when we are looking at one theme, which all of us want to play is what we call is election theme. Elections are approaching, you want to play the election theme. So, you want to make sure that what kind of fund which I should go and try to play.

So, we will now be holding a PSU fund as a part of our tactical allocation as a part of the thematic one. So, we have an Invesco fund, Invesco PSU fund. This fund is basically playing all the PSUs, manufacturing, shipping, defence and all those things and have taken advantage of it.

Just to give you an example, forget about what's happened. In 2014, six months run up to the elections PSU funds have generated 24% alpha over Nifty. In 2019 they have generated 7% alpha over Nifty, so they are risky. You want to play it, you may have to time it but you know, these are thematic you to play it and then one fine day you will say it's all good is good. I made my money, I moved away, and you just have to move away.

So, what we are today doing is that we have been playing this, we have been playing infrastructure as a thematic place, So, Tata infrastructure fund has been part of our model portfolio for almost 1.5 year now and this fund has done wonderfully well for our clients.

It generated great alpha, again, being an infrastructure fund is played on most of those capital goods. All those themes as a part of the story in India, I think entire China plus one story, manufacturing stories coming up, the infrastructure buildup is coming up. So, we picked up a fund which has more flavour of all those.

So, 1.5-year, 10% allocation, we have it here and we are not going away from banking. So, we continue to like BFSI. We continue to have an additional thematic allocation in that portfolio. Today we have around 20% allocation in our broad client portfolio depending on 5% here and there depending on the client to client, but we have this 20% tactical allocation, which is basically played through a PSU, infra and banking.

Prableen Bajpai: I also love the idea of playing the election theme. I really like that, and I think maybe we can do that even with the U.S. elections coming up next year.

Amongst the thematic funds because I was just looking at the NFOs there I did see two of the tech funds, you know, being launched one by Quant and one by HDFC. So, I think that is again a space which has done well in the past, pretty beaten down last year.

So, I think maybe a standard approach there can be a decent idea and if you look at the past returns in the sector, actually so at different periods of time you look at the SIP returns and it's not a lump sum investing, you can look at the SIP returns on a two year- three year rolling basis.

I think it has given 90% of the time, the returns have been about 15% So of course, past returns are no indication of what will happen going forward. Like that theme again, looks good to me. But it has to be before I think the sector turns around because it's already up a bit, 7-8% this year and I think we are going to see some pain but maybe that is one sector one can look at.

Prableen Bajpai: Yes, it's interesting. 2019, I was just calculating, we saw 145 NFOs, 2020 because of Covid, just about 52 and then 2021, it was 233 NFOs. So, I think it came with a bang because I wasn't ready to go to 143 and as I am talking about the filings, you know some of the NFO filings don't get approvals or sort of postponed.

This year till now we have seen 69 of them. So, very interesting combination, of course because I think newer AMCs are coming and every new AMC has to launch its own product. So, you will see a lot of the new AMC products there and rise in the passives as well.

So, you know, 5-8 funds, IDFC, you know, only filed in the passive space and this is equity and a lot of passive in the debt space as well. That is something that we saw in 2022 and just before you know till March of ‘23 also we saw a huge launch there and we are still seeing you know Motilal has actually filed US ETF, so developed markets exposure without U.S.

We are seeing Quant; it's coming up with the retirement fund. They filed for it with no approval as yet. So, lots of NFOs and then two themes again, Niraj here. One is the multi-asset, so out of the 13 funds that we have in the multi-asset space, actually four are less than a year old and there are about five funds which are currently ongoing NFOs or are in the pipeline. So, I think multi-asset we have seen a lot of launches and multi-cap as well.

Also, I think understandably because it's a newer category, a lot of fund houses had to sort of, you know, they still have that slot empty in their overall basket. 

Prableen Bajpai: I think another segment which I missed talking about is the Nifty one-day rate index. That is something that we were not really seeing earlier. That is another segment from where we have seen about five to six NFOs this year and there's already one fund which was in 2022, which was renamed Nippon fund, and this is basically for the trading accounts.

So, when you trade you get your money back in your Demat account. So rather than moving that money out into your bank account, this ETF is being launched, different fund houses have it, where you can just buy the ETF. It's like a one-day trade. So very low risk, very low credit risk, interest rate risk, and then you sell it, get your money back.

So rather than money sitting idle, it's like you can just park your margin money there and, of course, this is for active traders probably PMS providers as well as those who are operating in F&O. So that's an interesting segment again, which is a lot of launches there.

Amongst the ones which I like, multi-asset, I think is a good space to be in because currently I feel all the asset classes do look good in the sense that fixed income, we are seeing that yields are still high and with the inflation and with the I think the global stance of the central banks. I don't see that the interest rates will be cut very soon, probably two quarters away at least. So definitely yields are fine there.

Gold, I think is always a good addition to your portfolio and many of these multi-asset funds are also now having some allocation to silver or global equity as well. So, I think it's a good space for those who are not sure, who don't want to take a pure equity exposure, want to keep it slightly more balanced. So, this looks good, but within the multi-asset space, all different schemes have a different taxation.

So, for example, a fund is being launched by Kotak, it has equity taxation, but the one which is being launched by DSP has debt taxation with indexation. So, within that the person has to check what is the structure and then look for the right suitable product for themselves and I think even in the multi-cap space, I like that a lot of funds are being launched.

But investors can actually look at something which is already there. You know, pre-launched funds which are already there, which have a little track record, not necessarily going for a NFO and the Quant retirement fund, that definitely looks interesting. I like to see that because they say that they would move from equity to debt.

So, it's more like even gold, silver and 35% for equity. So, that would be a very different way to manage this fund because most of the solution-oriented funds are typically aggressive hybrid or a flexi-cap approach. So, this definitely looks different. So once probably, it gets its approval, we will get to know more.

Bharat Pareek: So, I think she covered most of it. So, I really don't have many funds left to talk about, I think one point where she mentioned is a multi-asset fund. Edelweiss recently came out with a multi-asset fund, and it was a combination of arbitrage and debt.

So, I think somebody who's looking to reduce the portfolio risk by not having an equity exposure, I think post tax changes. I think it's a great good fund. It doesn't have any equity exposure to it. It provides pure arbitrage. So around 55% of the portfolio will widen arbitrage return, and 45% of your portfolio will provide you with that debt kind of a portfolio. So, I think it's a good portfolio.

It does provide you the benefit of debt taxation, which is 20% post indexation, so it's a good fund, non-equity in a market today when you are looking for non-equity opportunities, with a tax at your disposal in terms of a better taxation and not to have any equity exposure.

I think it's a good fund, don't have too many in this particular category as of today. I think that's the one fund which recently came out with an NFO, and I thought maybe a good differential product compared to the rest of them. So, everybody's trying to fill that bucket of products as she mentioned. So those things keep coming.

We normally prefer ideas which provide additional value to the client and that's the whole thought process that every fund is evaluated in that particular context. I think this one fund has merit in itself.