Nilesh Shah, MD at Kotak AMC and Sunil Subramaniam, MD & CEO at Sundaram Mutual shared their investment philosophy in an interview to ET Now.
ET Now: The mutual fund industry has catapulted to significantly high levels, 2.5 crore SIP accounts and even in November 2018 we had seen that steady flow of SIPs come in despite the volatility in the markets. What do you have to say about the conviction shown by the Indian investor in mutual funds?
Nilesh Shah: I think the credit should go to three parties; one the regulator who has build the framework, which investors are now trusting. Second the credit should go to the distributor and adviser who have ensured that they have reached out to nook and corner of India and convinced investors to invest in a right manner. The third credit should go to the fund houses who have managed this money reasonably well to add value to clients portfolio. So the team work of regulator, distributor, adviser and fund houses have created this SIP momentum.
ET Now: There has been quite a few changes that we have seen in the mutual fund industry starting this year, be it the slash in the expense ratio, the re-categorisation of schemes and ban on commission in distribution fees. How do you think these regulatory changes really impact the overall landscape and impact investors more importantly?
Sunil Subramaniam: I think all of these regulatory changes are driven by the need for transparency as far as investor is concerned from the mutual fund side. So, I think whether you look at the regularisation of the schemes or if you look at the upfronts going away and only trail commission being allowed. I think the regulators desire is that the two things; one the investor should know clearly what is happening with his money. So if there is a midcap fund he wants to know it has been invested only in midcap and not that you have done large caps to improve performance at times and removed them when not needed. So I think that is clarity.
Second is in terms of the trail commission it aligns the investors interest with the intermediary distributors interest because if the NAV goes and the investor makes more money the distributor also makes more money whereas in upfront model the distributor takes the upfront but the investor may have seen a correction in his NAV and nothing has happened to the distributor. So I think these are all very healthy practices which have been introduced.
ET Now: Going into the next year what is the message that you have for retail investors, it is going to be a year that will be spiked with volatility? We have that big event the elections that is looming large over everyones head and there is going to be quite a bit of nervousness and choppiness in the equity markets. Given that investors are a tad nervous about putting money or remaining invested in the equity markets what would you like to tell them?
Nilesh Shah: Whether you are playing a spin friendly pitch or you are facing a pace friendly pitch or you are batting on a batting beauty the technique remains the same. Whether you are playing T-20, one day or a test match the basic approach remains the same; you have to hit the balls which are half volley and you have to safeguard yourself when you are getting a bouncer or a Yorker.
Same way for investors whether it is cheap market, expensive market, volatile market, non-volatile market either ways you have to invest on a simple basis, regular investor, long term investor and disciplined investor through asset allocation. The basic approach of making money continues to remain the same of being a long term investor, being a regular investor and doing asset allocation in a disciplined manner.
ET Now: While you say be disciplined and be regular the markets are looking very volatile so one cannot help but wonder about the timing being crucial, so could you also talk about the importance of the right timing in equities?
Nilesh Shah: The right time to invest in equity, fixed income, real estate or any other asset class is when you have money. You can enter the market when you have money, if you do not have money no matter what kind of market it is you will never be able to invest.
Second, timing the market is very-very difficult. The worlds best known traders have very limited chances of success. For an ordinary investor they should remember that trading is injurious to their financial health. It is time in the market which makes money for you. So be a regular investor, do not invest in lump sum, invest on a regular basis, maintain your asset allocation discipline, do not chase momentum, invest looking at the valuation that combination will create far better product for you.
Today, fortunately mutual fund industry has created balance advantage fund category where fund managers take call looking at the valuation of market between debt and equity and that product also should be there in part of every investors portfolio.
ET Now: Can you tell us some of the thumb rules to build the portfolio for strong returns perhaps for someone who is a first time investor who has no prior experience with investing anywhere?
Nilesh Shah: So one, if you do not know kaun si manzil pe aapko jana hai to woh safar ka koi matlab nahin hota. If you do not know what is your destination or final point then the journey loses its meaning. The same applies for the investors. Please remember why you are investing, is it for your retirement, is it for next years holiday, depending upon your end objective your construction of portfolio will be different. Second do remember utawale amba na paake.
A mango cannot grow overnight, mango cannot grow in a hurry, it takes time to generate return so you have to be patient, you have to be long term investor. Third tipe tipe sarovar bharay boond-boond se hauz banta hai. It is the small amount of savings invested in a disciplined manner over a period of time which creates wealth.
The markets are good for meeting your need but they are not good for meeting your greed. So please differentiate between your need versus your greed. Essentially for investors to make money the mantra remains the same; be a regular investor, be a disciplined investor through asset allocation and be a long term investor. Do not become investor because your trading bets have turned into losses. Do not end up losing being an investor because someone else made money through trading.
ET Now: Debt is an asset class that many ordinary investors do not understand but still how can investor reap the benefits of investing in the debt markets?
Nilesh Shah: So fixed income gives you a predictable return with reasonable certainty. It is not that fixed income is about bank deposits kind of return, even bank deposits have mark to market losses if one actually does the mental calculation. Fixed income is that part of your portfolio which you require in short to medium term where your risk appetite is limited and creating that combination along with other risk assets like equity, real estate you generate a portfolio which gives you stability as well as return. The idea is that Ferrari has a huge speed but at the same time probably let us say Ambassador has a huge safety. You want to create a portfolio which has speed as well as safety.
ET Now: What message do you have for these kind of investors, how do you saying we can look to change the mindset apart from of course, these kind of initiatives?
Sunil Subramaniam: I think the key message is to demonstrate that over the long run if you see our country todays inflation rates may be hovering around 4-5% but the long term inflation rate in our country is around 7% and the long term deposit rate is also around 7%. So while the investors may have been getting 7% in terms of return and their net wealth has actually remained flat over the last 10-15 years if they are invested in FDs.
So I think the first thing is to make investors aware that the equity market, for example, I have given 15% per annum returns over the last 15-20 years whereas FDs have been hovering around 7%.
The second is the more fundamental fact is that inflation which is what hurts wealth creation actually hurts consumers because prices of commodities and services go up but if they just pause for a minute and think that those who are suffering at the other end there is somebody who is gaining so the producer of those services and commodities obviously benefits from the rise in the price. So I think the equity market is just a channel and a vehicle to take that money and put it in the producer so while it may hurt you as a consumer as an investor you will benefit from inflation. So I think these two messaging consistently if we are able to do to investors they will also realise that equities is the best asset class to create wealth for your future.
ET Now: What would you advise investors who have put in money in mid and small cap funds, they have burned their fingers because certainly 2018 was not the year for the broader markets. So what would you advise them to do, should the bias be towards the large cap funds?
Sunil Subramaniam: I would say that the recent correction in the mid and small caps has a specific reason to it that the previous year I think there was a lot of money chasing midcaps which went into that asset class category and took up the valuations and then the SEBI regularisation scheme meant that lot of funds had to liquidate their mid and small caps.
So it is a very temporary phenomenon and ultimately if you see over the long run, we have done some studies, one is that whenever the economy does well it is the mid and small caps which benefit.
Second is that if you have a five year outlook even in mid and small cap mutual funds you have never lost money when you have stayed for five years. The third is that India in on the cusp of a long term enhancement in the GDP growth rate from 7 or 8% to 9 or 10%. Second the demographic dividend as the younger Indians come to work is that the per capita GDP of our country is slated to double over the next few years.
So I think the overall, the consistent SIP method of investment into mid and small caps means that over the last year actually you acquired more units during this period which will come to your benefit in the long run. So my recommendation to those who have excessively as you say invested in mid and small caps is to continue that investment and not worry about the short term repercussions but in the long run mid and small cap funds have delivered 3-4% alpha over large cap funds in the Indian economy.
ET Now: Going into 2019 tell us what exactly is your investment philosophy?
Sunil Subramaniam: I think for 2019 given that bang in the middle of the year we have a general elections due would be to balance the portfolio into 40% to safety and 60% into risk. When I say safety I am talking about partly into large caps, partly into consumption and consumer durables and those kind of things and when I say long term investments in terms of taking a little more risk I mean the capital goods sector because as you know capacity utilisation has been rising and in the second half of this year we expect a strong rise in the capacity creation process in our economy. So I would recommend that investors maintain a 40:60 balance between safety and risk during the current year in terms of their portfolio allocations.
ET Now: Convey your wishes to our viewers?
Nilesh Shah: Well my wish for investors irrespective of new year is simple, growth rich, make money but for that to happen they have to ensure that they follow the mantra of regular investment, long term investment and disciplined investment.
ET Now: What is that one wish that you have for the New Year going into 2019?
Sunil Subramaniam: I think my new year wish which should be true of every stock market and mutual fund participant in the country is for a continuity in the government so that the reform cycle which has started from 2014 to now in multiple spaces like in roads and in infrastructure creation, in ease of doing business I think we are on a very good wicket as far as an economy and the continuity of the government is what I would pray for because then over the next five years cycle you will see coming to fruition of all the investments that our country has made over the last five years. So I think from an economy and markets perspective that is the best New Year wish that I could wish.