The Mutual Fund Show: Why Young Investors Should Opt For Equity Schemes

Nimesh Shah: See, 2024 is going to be a special year as we have a special year every five years. It's going to be an election year. So I have got zero expertise on what will happen politically. So let us leave that incident away. But you cannot, as an investment person, I cannot wish or wash away that issue, though I don't have expertise in that area, but in the short term, you cannot just say that it's not there. So it's going to be an election year and the way the election goes, it will have a great impact on the returns that one can expect in 2024. But in the long term, obviously we all know that markets ultimately over a three-year or five-year paradigm will follow the earnings. So, 2024 is very interesting. So I am keeping the election part away because anyway, we don't have any expertise on that.

But overall, we are in a very interesting phase as a country. We have never had one in the three decades of my career. I have never had such an interesting and strong macro over so many years. Look at the rest of the world. Look at the macros of the rest of the world and look at the macros of India. So we enter 2024 where the government macros and government numbers are very strong.

With the Indian banks, there seems to be nothing going wrong with lending. Balance sheets have been cleaned up. They are squeaky clean. Neither have new problems surfaced till now. They are able to take more and more risk and manage it well. So, you have a strong government and you have got strong banks and you've got very strong corporates. Where have you seen this kind of scenario where the corporate leverage is very, very low? Corporates are yet to grow. As corporates have the capacity, utilisations have been fully done up. There is a shortage of power in the country. Going forward, there are going to be power projects in the country. There is going to be a lot of capital investments in the country. As all that happens and as the capital goods industry picks up, bank credit will also pick up.

We are in a very nice phase as far as the economy is concerned. There are absolutely no complaints. The rest of the world is looking weak. India is looking strong. India has managed its past macros well. Corporates are strong. Banking is strong. Indians are not as leveraged. So things are doing well overall.

Nimesh Shah: When you meet corporate bankers, when you meet people who deal with corporates, there are a lot of inquiries happening.

We are very bullish on Indian manufacturing. See, I am not saying a great revolution or everything is getting revolutionised, but I am saying that whatever is happening in the geopolitical situation in the world. Indian manufacturers have withstood China for 20 years, despite China exporting deflation across the world. Indian manufacturers have survived that.

Now, the world is looking at one more producer. I am not saying everybody's rushing into India, but ask any corporate, who has got quality products, whether it is textile, chemicals, every sector that you go to—Are there more inquiries than earlier from outside? The answer is invariably, yes. A lot of those inquiries are getting converted into orders and they will result in work ethic. So we are very bullish on the capex cycle in the country. That, finally it is coming. I am not saying a revolution, but even if there are more orders. I am talking about a healthy and high teen CAGR. Is that possible? Yes, it is possible. Even if you see the last five years. Ultimately, our markets are going to follow earnings pressure. Last five years' earnings per share has grown 13% market. Nifty has given a return of 13%. So ultimately the market is going to follow earnings. And earnings is going to be very stock-specific, because I can't say that the markets are overall cheap. So, markets are neither very cheap, nor are they very expensive. So we are in an interesting phase.

Nimesh Shah: See, risk management teaches you one basic thing—that whatever has become expensive don't buy that, and whatever is relatively cheaper, buy that. But one has to know, there are three parts of the market—large cap, mid caps and small caps as the SEBI has defined. Mid cap is a very, very artificially created zone, where only 150 stocks have been defined as mid cap.

Of that, most of the mutual funds or most of the DIIs will be investing only in 70-80 stocks. So that part is genuinely overvalued, because all of us are investing in the same kind of stocks. And, there is a substantial amount of mid cap-funds in the country and all are investing in the same stocks. So that part is genuinely overvalued.

The next part is small cap. In a rising market, there are lots of smart operators in the system. So there would be some pockets of overvaluation in various stocks. Having said that, if you it is a stock pickers’ market and if you're able to identify, there can be a bubble kind of situation in mid caps I feel. So, we can get into that situation in 2024 because it has made so much return in the past that all the money is coming into mid-cap and small-cap funds. If huge amount of flows are coming into mid caps and small caps, then people are buying expensive stocks. So, if nothing else, I would like to tell you people who are watching this channel right now, do not buy things which are obviously expensive. I am not saying things are going to be corrected but returns will be limited from that. So, if mid caps and small caps have done very well in the past, from a risk management point of view, I would definitely invest in large caps because from a risk-return point of view, large caps look much better than mid caps or small caps in the current market.

Nimesh Shah: That’s why I said, it is stock pickers delight in 2024 in the small caps. I am not talking about mid cap. Mid cap is a very expensive market. I won't touch it. In the small-cap segment, can I see a lot of companies? See, in our alternate space, we run PMS (portfolio management scheme) and ETFs (exchange-traded funds). In that, we do our pipe structures, where we essentially invest in small caps.

We see a lot of businesses, the earnings per share of which we expect over the next four years to double. And in a lot of those companies today, the P/E ratios are actually lower than in the past, despite them doing well. So, when there is a specific small-cap portfolio that we have got, the companies have shown a very good profit growth. The ROEs (returns on equities) are increasing. Still, we are getting them at a lower P/E than what it was three years back. Why? Because, the earnings per share has gone up much more than the share price … The earning per share has gone up by 38% of their portfolio. So, today it is cheaper than the rate at which I bought it. So it is still a good hold because ROE is only increasing. So, there are companies where profit growth is happening. ROE is expanding and still they are available at a low P/E and there is a reason for that.

A lot of fund managers would not have come after 2007. When did the sectors last do well? These sectors last did well before 2007. So, people who have become fund managers beyond 2007, they have yet to identify how to invest in those sectors. So still, the P/Es are less because the market has not taken a great fancy. So, is there reasonable money to be made in those stocks? But one has to be careful with those stocks with a lot of potential. There are many other stories also flying around. So it is a stock pickers' market.

Nimesh Shah: Since the past so many years that I have been doing a show with you, I have always been saying that hybrid funds are what the Indian diaspora wants. I am very clear, Indian investors want to invest in equity. At the same time, they can't digest volatility.

And now, there is another thing that has happened, because of which hybrid funds are a must. The changes in taxation on the debt side that is fully taxable if you come in with debt funds. So the only way to invest in debt and not pay the full debt taxation is by investing in hybrid funds. My case becomes stronger than what I would have done eight shows with you every year. This ninth show is much more powerful, because again, the same multi asset fund, which I have been advocating for the past 15 years, it is called ICICI Prudential Multi Asset Fund. Why do we say that? Because, almost 65% of the money is in equities, 25% money is in debt. You get the same taxation as on equities and 10% isn't good. We are very constructive on gold right now.

So, we have got a variety of hybrid funds depending on the aggression that you want to play in the market, depending on the equity that you want in the market. A balanced advantage fund will have around 35% to 40% investment in equities, while a multi asset fund will have around 65% into equities. So, investors should look at hybrid funds very, very seriously because that's the way to invest because of the taxation in the debt fund. Hybrid funds are the way to invest, as it protects them from volatility because they don't like volatility and it is a tax advantage way of investing.

Nimesh Shah: That is the last thing that I would say on any show. Past performance is not for the future. And that's what we keep on saying and I will continue saying that. I will give you the reason for investing in a multi asset fund. Past track record should only be seen to know whether the AMC knows how to manage the money. It's only an indicator of what has happened in the past. It has got nothing to do with what should be expected in the future.

I would say that it has been very lucky to be in a country like India, where the nominal growth rate in the country is around 11%. If the nominal growth rate in the country is 11%, equities would give you slightly better returns than that. So one should expect that kind of returns and the last five years also are indicative. In the last five years, the market has given 13% return and earnings per share has also been 13%. So, that is a very fair indication of what it will depend on, how much the earnings will grow.

You said mid caps and small caps have done very well. It is because their earnings have done much better than those of large caps. So, now even in mid caps and small caps, if you see very carefully the share price growth is lesser than the earnings per share growth. So, it is a very, very healthy sign that is happening. The share price is only following the earning pressure. P/Es are not getting expensive.

Nimesh Shah: Fortunately, or unfortunately, our companies are dependent more on the Indian markets than on the international markets. So, companies that are there in the export segment will be impacted to that extent that the world is. I am not saying it won't be affected. We get two impacts—one is the country's export companies get affected and another, very important thing is because of the FIIs selloff, like it is happening currently.

But now, India is very, very robust to balance out the FII flows. The 2021-22 fiscal has shown us that almost all FIIs sold 5%. Look at 2008, look at 2020. FIIs sold 5% of their holdings in 2008 and the market fell 56%. While FIIs sold 5% of their holdings in 2021-22 as well, market fell only 10%.

So, that's the difference and I am seeing in the current one and that is because of the kind of shows that you're doing. The kind of education that the media has done and I will give the complete credit to the media and not to us.

The media has educated the people so much that if the markets fall from 66,000 to 63,000, we start getting inflows. So, DIIs are very well-balanced there to balance the FIIs. So, I am not that concerned. I think we are balancing out the FIIs quite well. So, from both points of view, I don't think the world will matter. The export companies will get better and we can't have a very wild market if the world is selling ...

Nimesh Shah: You used the word young investor. Though you didn't ask that question, I am going into that area, where young investors are going into. They should be investing and not speculating. That is the first thing. And I will come to mutual funds. But the problem is, there are too many people getting into these options and futures. So, it seems that it is easy money. SEBI has given that data that out of 100 investors, 89 are losing money. So, 10% of the people are making all the money and 89% are losing money. So, young investors should first get into equity for investment, if they can understand the companies and if they understand how the earnings per share will grow over the next three to five years. Otherwise, we are there to manage money with a nominal cost.

How do you buy mutual funds and which mutual fund do you buy? There are so many schemes. We all have got so many schemes but I think I would give my money to the person whom I can trust. So, there has to be ultimately a trust in the brand, the brand that you're investing in. Is it a trustable brand? Is it a big brand? What is our business? Our business is to attract the best people to manage money? Will the brand be able to get the best people in the market to manage your money? Is the brand big enough to attract the best investors, and the best fund managers to work with you. These are the two questions: Is the brand trustable? In the Indian context, will they close shop and get out of this country? Will that happen or how will they manage the money? Will they be able to attract the best of the minds to work with them in their company? These are the two questions. Past performance is only an indicator that they have done well in the past. Do not invest in a fund just because the past performance looks very good. That is only one filter. Ultimately, there has to be trust in the brand that you're investing in.

Nimesh Shah: See, there are many fund managers. Ultimately it is a person's call about which brand to trust. Sure, I am only going on one point, but there are many technical factors I can go into. But I myself look at the person, I take a judgment on the person and invest with the person. That's how I look at it.

Nimesh Shah: See, I always believe that if you can spend a lot of time in the market compounding it makes a lot of sense. So, whether you invest with any of the credible brands as you referred earlier, if you stay in the market for a long period of time, give it time, money is not going to make quick. Only in F&O (futures and options) you can make money quickly or lose money quickly. Sometimes if you become lucky, you suddenly make a lot of money. This has happened. In fact, be very cautious when you make a lot of money. I meet so many people who think they are experts and when they talk, you realise that they are not experts but they have made money. Is it true that they have made money in the last year or two years? Yes, they made money. The problem is they have started believing that they are experts in that without understanding what the company's profit will be in the future. You don't know anything about the company. Somebody told you and this has happened. I have been seeing it for the last 30 years, since Harshad Mehta’s 1992 boom. We have been seeing that people start believing that they are experts when their calls go right. But unfortunately, it all ends with losses, because it is intoxication. The intoxication of going right is too high. So beware of that intoxication. That's what I'll tell the young guys and beware of that intoxication that you are always right. It does not happen that way.

Nimesh Shah: I will decide how much volatility I can take. A person like me, I can take volatility. I don't get worried if my portfolio is down 20%. I won't worry, my sleep won't get affected if my portfolio is down 20%. So, I will go for a pure equity scheme and I will, because mid caps and small caps are very expensive today. I will take a large-cap fund, or a flexi-cap fund. I will take a flexi-cap fund so that the fund manager has a choice of investing in large cap or mid cap.

And, suppose I have a person who cannot take volatility. The simple answer is ICICI Prudential Balanced Advantage Fund or ICICI Prudential Multi Asset Fund because it will give you an allocation to equity, it will give allocation to debt and it will give an allocation to gold also. In the multi asset fund case, it invests in all three asset classes.