scorecardresearchHybrid funds offer better post-tax returns when risk and reward are in

Hybrid funds offer better post-tax returns when risk and reward are in balance, says Santosh Joseph

Updated: 25 May 2023, 09:46 AM IST

In an interview with MintGenie, Joseph said that one must always strike a balance between risk and early retirement.

Santosh Joseph, Founder and Managing Partner, Germinate Investor Services LLP and Refolio Investments

Santosh Joseph, Founder and Managing Partner, Germinate Investor Services LLP and Refolio Investments

Investors must look at the valuation that each sector is offering relative to the market, relative to the growth that one expects in the market, says Santosh Joseph, Founder and Managing Partner, Germinate Investor Services LLP and Refolio Investments.

In an interview with MintGenie, Joseph said that though one may guess that a good one-year performance or a smaller AUM or larger AUM is a good way of choosing the fund, it may not necessarily be true.

Edited Excerpts:

Q. New fund houses are coming up with new fund offers every week. Does this highlight the increased optimism of mutual fund investors?

Fund houses are launching new funds. They can be divided into two categories. If any particular fund house does not have a product that is now allowed for them to offer, they can offer it as a new fund offer. Second, a lot of smaller or newer AMCs that are filling up their bouquet of offerings, for example, new AMCs that have got their approval in the last two to three years would be trying to complete their entire basket of Flexicap, Multicap, Largecap, Midcap, etc.

The players that are older are looking at opportunities where if any product is specifically missing, they would add that to complete their offering. The reason why everyone is coming out with so many fund offers is that it gives them the opportunity to market, advertise and reach out to the investor and the distributor community. So, generally, people resort to new fund offers to increase curiosity or increase marketing and sales awareness.

At some levels, these new launches are done when the markets are largely optimistic. They believe that flows in equity get better and therefore it's the right time to access the market with a new fund offering. It is also important to note that, whether the markets are optimistic or not, in some genuine cases there may be a need to do this depending on the need of the hour or the market situation at the moment.

Q. International credit card spending attracts 20 per cent TCS. So, many people have voiced their opinions against this direct tax levy. What is your view on the same?

International spending on credit cards is being hit with a 20 per cent TCS. It is a bit of an irritant because it becomes cumbersome for us to maintain receipts and records of the spending and eventually get the credit for the TCS. But I think we have already got some clarity that up to 7 lakhs worth of transactions done on credit cards for international purposes or international travel is now exempt and anything over 7 lakhs is what the ambit is right now focusing on.

The reason why many of us are not happy with the TCS is that for many the interim, it is increased cost, and for some who do not have the ability to maintain a record of all this and file the taxes and get a claim for the refund, they may feel that they are missing out on the benefit of the TCS. So, considering it’s a new levy it is bound to take some time and bound to find a lot of backlashes. Eventually, when people understand the process or mechanism of how this works it may get a lot more acceptable.

Q. Many new-age investors choose mutual funds based on past-year returns and AUM size. How would you advise them regarding their next mutual fund investments?

For a new age investor, one of the things that they have that is advantageous is the availability of information. If you were an investor 10-15 years ago, you had very limited information in terms of how you accessed it. Today, thanks to technology and so much online data available, information is available at your fingertips. So, the new age investor has so much information and they use this to make a decision. Largely this is a selecting or filtration mechanism.

In this mechanism, they would like to go by how the fund has done in the past year or the recent year which is the past performance. They would also like to look at the size of the fund. They would like to know if the size of the fund and the performance isn't adding up.

Normally, these may be good macro indicators or lead indicators but not always a winning formula or a successful method to select a good performing fund. There could be times when a good fund could have small assets under management (AUM) size and with less or low one-year performance or there are also instances where really large funds, even though they are very large, tend to out beat the index and be in the top quartile of their peer performance.

So, though one may guess that a good one-year performance or a smaller AUM or larger AUM is a good way of choosing the fund, it may not necessarily be true. It is always better to delve deeper than just concentrate on these things. Look at the five or 10-year performance they have had or look at track the record of the fund manager who is going to manage the fund.

Even look at how the peer group has performed with size being big or small or look at the positioning of the funds. Sometimes in similar categories, the funds can be positioned very differently. In short, either they have to conduct deeper research or seek help to make sense of all the info that is available.

Q. Following taxation rules on debt funds that kicked in on April 01 this year, HNIs are now shifting their money to FDs. What other risk-averse investment options do you suggest them?

Post introduction of business tax for debt funds effective from April, many investors have seized the opportunity to go to fixed deposits (FDs) that are straightforward, have no volatility, and have fixed guaranteed returns in their perspective. When the taxes are equal and the FD rates are attractive, it makes sense to look at FDs because of the comfort of managing them very easily in their bank accounts. Likewise, today some corporate deposits or what is popularly known as bonds, depending on who the issuer is and depending on what tenure that the investor is looking for, there are good opportunities available even there.

Today, we have more issuances than before and there are quality checks to say who is rated, how, and finally some of these bonds also have sufficient liquidity just in case somebody wants to sell them or have a premature trade done to take back their money. Thus, there are plenty of opportunities in the corporate bonds or corporate certificates of deposits available for investors to think outside the mutual fund. Earlier FDs were the primary option but now you can opt for attractive bonds also.

Q. Loss of indexation benefits has affected debt fund returns. Do you advise investors to opt for hybrid funds instead wherein they can benefit from both equity and debt instruments in those investments?

I agree that the long-enjoyed benefit of capital gains for debt funds and set off of losses, these benefits all made debt mutual funds very attractive. But when you look at it from a different perspective you had to anyway wait for three years to qualify to get the benefits of long-term capital gains in debt funds.

If one does have a three-year horizon and you do choose a hybrid fund, maybe a dynamically managed one where the risk is within your limits or some things that an investor can digest or manage, then you have a winning combination here where you get the benefit of being in hybrid funds which offer maybe more favourable tax treatment and also get the benefit of slightly higher return when your risk reward pays off for you.

While the investor may be worried about missing out on the benefits in debt, moving into a hybrid and being consciously aware of the risk-reward can give him/her better post-tax returns and the benefits of even long-term capital gain.

Q. The new generation wants to retire early to pursue their dreams. How do you advise them to achieve their financial goals faster?

One thing that is so true is that the younger generation is not looking at retiring late in life. They are looking at retiring as early as possible. Maybe because the kind of jobs they do today are way different than what one of us was doing 10-20 years ago and therefore even the investment pattern is going to be largely different.

We have come off from our history of being largely in fixed income or debt or FD products and now we are slowly as a nation from only being into saving in fixed income products into equities. So, for a person who wants to retire early, they must look at their portfolio according to how much blend of debt and equity they will have in their portfolio and also not to forget the risk it carries. While they may want to retire early and look at aggressive equities to reach their goals faster, it's also going to be fraught with a set of risks about what will happen to the portfolio when you are heavily loaded into equities which are a volatile asset class.

So, while everybody is consciously looking for retiring early and may be willing to take a slightly higher amount of risk, it's also important to bear in mind that in the interim and short term, the risk also could go negative therefore be careful. Always strike a balance between risk and also early retirement. So, you can optimize on both and also you are well in line for early retirement or thereabouts.

Q. The market is currently moving sideways. Which sector(s) do you think would break the current lull in the market?

Yes, the markets are sideways and this has been like this for almost the past 12-15 months. This is a great experience in learning for many new-age investors and even for seasoned investors. Maybe the seasoned investors will not be so worried because markets do have many phases.

  • Downward trending phase
  • Upward trending phase
  • Sideways phase where you could spend a long time moving neither significantly higher nor lower.

In this particular phase usually consolidation happens, new sectors break out and sometimes the old sectors get re-rated or old sectors get so ignored that they become very attractive in terms of valuation and go up. So, rather than just predict what the sectors do well, I think what is important for us to look at is a valuation that each sector is offering relative to the market, relative to the growth that one expects in the market.

So, you will always find that in a consolidation phase, some sectors tend to become affordable, relatively cheaper than the broader market and I think when one starts looking at that, you clearly have an opportunity to play into the future. When you see value being offered in the market you grab it with both hands so that you play for the recovery and also play with sectors that are going to definitely outperform within the recovery phase of the markets.


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First Published: 25 May 2023, 09:46 AM IST