Beating a benchmark’s return is not easy anywhere because of a number of reasons including high cost, disproportionately high redemptions and easy availability of information, explains Abhishek Dev, Co-Founder and CEO, Epsilon Money Mart.
In an interview with MintGenie, he also explains why investing in mutual funds, particularly via SIPs is far better than investing directly in stocks. He also has a word of investment advice for young salaried individuals, about investing in cryptos and last but not least -- the market outlook in the wake of Ukraine war.
Edited excerpts:
What do you think are the reasons for the not-so-great performance of active fund managers in the mutual fund space given that most fail to beat even the benchmark index returns?
Active funds perform as per the discretion of the fund management team and their management style, who which may or may not beat the index from time to time. Cost is another factor because of which active funds could see underperformance. True to label guidelines as per the product categorization rules ensure that various funds operate in a well-defined universe. When markets go through a lean phase and the fear factor is high, unfortunately some investors rush to redeem, forcing the manager to liquidate stocks to raise cash – including their high conviction ideas.
A combination of these factors could impact a funds’ performance vs their index. This is a global phenomenon, more so in developed markets where easy availability of information and transparency reduces the advantage of a Fund manager vis a vis investors at large. This is similarly seen in India, particularly in large caps.
Mid and small cap stocks are a much larger universe, are relatively less researched with low analyst coverage and suffer from liquidity issues. Hence the opportunity for good fund management style and bottom-up stock picking is better, which could lead to an alfa over index.
In India, most investors refrain from investing directly in the financial markets, and there are few options for small investors apart from mutual funds to make some gains and make the most of the Indian growth story. What do you think keeps retail investors away from the markets?
More than focusing on ‘what’, we should focus on ‘why’ retail investors stay away from directly investing in the markets. The market is relatively young (Nifty index is less than 30 years old vs a Dow Jones which has a track record of over 125 years) and developing. Over the past 30 years, Investors have seen high levels of volatility owing to different global and local incidents.
Little information was available to the investing public till 10 years back and there was misinformation that big investors make money by eating the pie of the retail. Another big misconception was that you need a lot of money to buy stocks. Also, we Indian investors are generally risk averse, and believe we are better off investing in tangible assets like land and gold. But we are seeing a generational shift now with retail investors maturing over various market cycles and are now a power to reckon with.
The power of SIP is slowly but surely gaining traction with over ₹12,000 crore of monthly input. The number of retail investors investing in markets either directly or through Mutual Funds is growing. Several changes in regulations by SEBI which favour small investors and make markets less opaque is one of the many reasons. Companies are also coming up with new avenues of investment.
We believe this number will only increase. Now regarding investment in market through mutual funds, if an investor does not have time or resources to research companies and economy and execute trades by themselves, what better than Mutual Funds. Many funds have over 20-year track record now and they have helped investors with significant wealth creation.
What advice would you give to a young salaried individual who wants to invest? Should one focus more on debt investment or is equity the way to go?
Since they are young, their risk appetite should be more as time is on their side. We would recommend to them a diversified equity portfolio containing a mixture of large-caps, midcaps, small caps and flexi-caps. Around 20 percent allocation should be made in debt. Some inflation hedge in the form of gold can also be made. For a DIY investor, we suggest ‘rule of 100’, meaning ‘100 - your age’ should be your allocation into equities.
What is the best way to make a healthy and risk averse portfolio? Oftentimes investors go for over diversification in order to cut down on risk. How can one avoid this practice?
Peter lynch has said, if you diversify just for the sake of it, instead of reducing your risks, it leads to di-worsi-fication. He meant that investments should be made in such a way that there is a perfect balance between risk and reward. We suggest hybrid funds for investors who are looking for less risk but want reasonable participation to equity. Debt funds are a good option for investors looking for some change to that of fixed deposits.
What is your outlook on investing in cryptos and NFTs?
We are of a firm belief that whatever investments you make, you can sleep peacefully at night with them. And that asset allocation holds the key. Regulatory oversight, relevant rules and laws and an underlying are a must for reasonable investment. Caution should be made as before the new upcycle begins many angels will fall. We leave it to the investor’s discretion as to what level of risk they can take, to us, currently Crypto investments are a pure gamble.
As markets around the world are struggling in the wake of the Ukraine war and historic inflation. What is your outlook of the market going forward?
Markets are forward-looking and always try to digest as much news as possible all the time. Not going too far into history, we saw Nifty falling to 7500 levels in March 2020, when there were less than 1,000 cases in India and reaching peak when there were cases all around us. Inflation will remain sticky, and the street expects some more rate hikes.
What we are seeing right now was last seen many years ago. So, keeping our heads down, we will be cautiously bullish. We should be more focused on how Indian markets and economy are faring. China + 1 is a reality now; for EU + 1 we are rightly placed. Domestically, consumption is seeing an uptick, auto sales are nearing pre-COVID levels and banks are ready to lend again. UPI and easily available and low-cost internet have made both start-ups as well as the unorganised sector flourish.
While we are talking about this, India is among the better performers among equity markets globally. Some pain is of course felt by overvalued stocks and select small caps.
Also, I would like to bring to your notice the fact that every year we can find reasons not to invest in stocks. But every time the Indian stock market has been able to play to it growth and potential over a medium to long term.
Therefore, invest with discipline, continue with your SIPs and this too shall pass. Those who stay the course, maintain allocation discipline and remain invested more often come out as winners in the investments business.
