The unexpected volatility in the global and domestic financial market in the recent past has made investors nervous. Investors want clarity on a large number of issues related to investment in the market.
In an interaction with personalfinancewindow.com, Ramesh Kabra, head, Product Development at Taurus Mutual Fund, addressed all the important issues and concerns ranging from the volatility to the safer investment destinations available in the market. Ramesh Kabra has been associated with the mutual fund industry for more a decade and worked in various capacities at different locations.
The equity market has been volatile for the past one-and-half years. When do you think the equity market will stabilise?
Equity markets are by nature cyclical. They can also be volatile in the short-term. Markets have already risen 100 per cent from the lows it touched in March, 2009. Timing the market is a futile exercise. An investor has to follow the disciplined way of investing. An analysis of the past data proves that over a longer time horizon (five to seven years), equities have proved to be the most rewarding asset class. Stability is a relative term.
India has weathered the global economic downturn much better than many developed economies. India's GDP is expected to grow at a much faster pace compared to many other economies in the next three to five years. FIIs who withdrew more than US$ 11 billlion from the Indian markets during 2008 have already invested close to US$ 10 billion in Indian equities in the first eight months of 2009. The post-poll political stability has definitely added to the comfort level. India is a long-term structural story and we are in a structural bull run. There will be corrections on the way. These need to be used to build a good long-term portfolio.
How is investing in the market through the mutual fund (MF) route safer than direct investment in the market for retail investors?
For retail investors, investing through equity MFs should be the desirable route. Retail investors may not have high risk-taking capacity or requisite acumen and expertise to analyse the stocks directly and regularly monitor the market and the companies. MFs offer an opportunity to invest in a diversified well-researched basket of stocks at a relatively low cost.
The advantages that MFs offer include professional management, affordability, liquidity and convenience. Besides, they are well regulated, transparent and tax efficient. Having invested in a MF scheme, the investor need not track the Net Asset Value (NAV) or performance on a daily basis.
Currently, MFs are introducing fewer equity-linked schemes and are offering more fixed income schemes. In which way are these schemes better than the equity-linked schemes for the retail investors?
Comparing the equity schemes and fixed income schemes being offered by MFs would be akin to comparing oranges with apples. The investment objective of both the schemes are different. An investor needs to put his money judiciously in a combination of schemes so as to get the right mix of growth, income and stability. The choice of the schemes would depend on several factors like investor's age, his risk taking capacity, investment horizon and the goal for which he is investing.
Most of the fixed income schemes being offered now are Fixed Maturity Plans (FMPs). They are close ended in nature with a fixed tenure. The objective of such a scheme is to generate steady returns over a fixed period by investing in debt securities with maturities corresponding with the maturity of the plan. As these schemes are more tax efficient than the traditional fixed deposits, investors who desire to invest for a fixed term can look at these schemes.
Equity schemes by nature are for long-term wealth creation. Instead of looking out for a New Fund Offering (NFO) for investing in an equity fund , the investor can select a couple of existing, well diversified and thematic funds with decent track record.
In the current market scenario, which MF schemes are safer and can beat volatility to offer an attractive returns?
Instead of shaping the investment decisions based on the market movements, the fund selection should be governed by the asset allocation model. Higher the returns the investor seeks, higher should be the risk he should be prepared to take. Only that money should go to equity funds that is not required in the foreseeable future ie invest for long term so that he is not forced to withdraw in a depressed or declining market.
Investments should be structured to meet the financial goals. If the financial goal is long-term ie saving for retirement, marriage or child's education, a major portion of the investment should go to equity funds. To give an example, a 30-year-old employee can allocate 70 per cent of his monthly savings to equity funds while a 55-year-old employee should not allocate more than 30 to 40 per cent of his savings to equity funds. It would be better if investors do not try to time the market entry and exit. It creates psychological barriers to investing.
Funds are more likely to deliver good returns if investments are made in a disciplined manner. Investors can do periodic portfolio rebalancing. In times of extreme exuberance, the portfolio tends to get skewed towards equity -- the investor can move a certain portion of the investments from equity funds to fixed income funds so as to rebalance the portfolio to the pre-determined asset allocation. The reverse should be the case in times of extreme pessimism.
How attractive are the Gold Exchange Traded Funds (ETFs) in a volatile market?
ETFs offer an excellent opportunity to the investors to participate in the bullion market without taking physical delivery of gold. It is a cost-efficient, secure and tax-efficient way to access the gold market. The daily NAV of the Gold ETFs are decided by the price of gold. An investor needs to have a demat account to buy units of Gold ETF. Gold ETFs cannot be a substitute for equity funds or other asset classes. Again following the asset allocation model, an investor can allocate 10 to 15 per cent of his portfolio to Gold ETF.
Can you suggest a MF scheme or product, like the banks offer fixed income schemes, which can provide monthly fixed or variable returns to professionals after their retirement?
In the MF space, there can be no ready solution to provide monthly fixed returns to professionals after their retirement. According to me, if the investor follows the following plan he can look forward to a peaceful retired life.
If the investor starts a Systematic Investment Plan (SIP) of Rs 5,000 per month in a diversified equity fund at the age of 30 and invests for the next 30 years (assuming he retires at the age of 60). He would have invested Rs 18 lacs and assuming a CAGR of 15 per cent, his investments would be worth approx Rs 3.5 crs at the time of his retirement. He could keep this amount in a fixed deposit or in debt scheme and opt for a fixed monthly withdrawal.
This example assumes that the investor would only invest Rs 5,000 per month. In reality, as the investor's salary level and his propensity to save goes up he could increase his monthly SIP installment and can look forward to a still bigger corpus at the time of retirement.
How do these SIPs work?
My answer to previous question has already illustrated the advantages of a SIP. SIP is an option through which the investor can decide to invest a fixed amount on a monthly basis for a fixed period in the scheme(s) of his choice. SIP in an equity fund acts as a tool to create wealth in the long-term.
There are several advantages of opting for a SIP in an equity fund:
(a) allows the investor to invest even a small fixed sum of money at regular intervals
(b) It reduces risk by making volatility work in investor's favour
(c) It provides the benefit of rupee cost averaging -- investors gets more units at low NAV and vice-versa
(d) Power of compounding allows small amounts to grow into a significant amount in due course of time
(e) Imparts time tested discipline to investing and helps to manage anxiety caused by dips in the market.
It is very simple to operate a SIP -- after the initial account opening it can work automatically through a standing instruction. Investors should not make the mistake of closing the SIP during a bear phase in the market. Markets are cyclical and during a bear phase the investor is able to get more number of units as he is able to buy low. SIP in three to four equity funds should be able to give the investor the necessary diversification.
Which MF schemes offer the best returns?
The choice of the scheme would depend upon the investment horizon of the investor. Equity funds can give a very good returns in the short-term but they can also give negative returns. An investor who wants to park money from 15 days to six months can look at Short Term Debt Funds (Liquid Plus Schemes), while a risk averse investor with one year horizon can look at FMPs. Investors with investment horizon of 18 months to three years can look at Income Funds or MIPs. Investors with long-term investment horizon of five years plus should look at equity funds.
Again in the equity funds space there are large cap funds, midcap funds, thematic funds, dividend yield funds, sector funds, index funds, contra funds etc. The risk return potential is different for different types of equity funds.
Investors are interested in investing in the foreign markets. Which foreign markets are attractive now in terms of safety and returns?
As a measure towards risk diversification, investors can decide to invest in the foreign markets. Several fund houses have launched International Equity Funds that are either global in nature or investing in a particular region or particular country. Some of these funds invest directly into foreign stocks while some of them have adopted the Fund of Funds model. These funds in addition to the country specific risk also carry the currency risk.
Matured investors depending on their preferences can allocate a small portion of their investments to International Funds. Funds investing into developing economies like China, Indonesia, Brazil among others are expected to perform better.
What is your advice to retail investors who want to protect their investments along with gain attractive returns?
My advice to the retail investors would be to do their homework well and follow the asset allocation model. They should look at all the asset classes like Equity MFs, PPF, Insurance, Gold and Bank Deposits and follow a disciplined approach to investing.
Of all the asset classes, equities offer the best potential for wealth creation in the long-term and hence should not be ignored. Investing in equity MFs through the SIP mode is the best option. Investors often try to time the market and unfortunately more often they end up 'buying high & selling low'.
When markets are falling they get fearful and do not invest expecting it to fall further. When markets are rising they cash out soon. Markets often turn around before the investor notices and he fails to invest and loses the opportunity. Retail investors can avoid this dilemma if they decide to invest in a disciplined manner through the SIP route. It is a recipe for the long-term success of the portfolio.