In an interview with ET Now, Dhirendra Kumar , CEO, Value
Research, shares his outlook for mutual funds. Excerpts:
2011 has been a sort of write off for equity investors. What should they be doing with their fund portfolios right now? Is this the time for a cleanup and if yes, which funds should be done away with?
No, I do not think investors should be behaving in an erratic manner because one is faced with a declining value of the scale. One has to look at it, one should not lose the sense of proportion here. If you look at funds on an average, in fact 2011 was a year of contractions because we normally expect that large caps will be able to withstand a market decline much better followed by midcaps and small caps will see a massive erosion.
What we find is that small caps and midcaps were able to withstand the market decline much better than the large caps and large caps on every possible occasion or they were looking for an excuse to fall primarily because most of the big declines in a brief period came from FII actions. So that impacted large caps and that was visible.
That is why we see a little difference but investors need to really take lessons from 2011. If investors sided with funds, the emphasised funds in their portfolio which were not mainstream, for example the most popular fund in 2010 was the banking funds. Likewise in the year before that, investors still kept patience with an infrastructure fund which showed no symptoms and people are expecting for the good time to be back with those.
Investors have not exited these funds as aggressively as they should have in the hope that they will be able to recover even the money which came before 2008, that money stays there. So keeping away from anything which is stylish, fashionable and has lost its charm, investors need to really get out of those, but with a mainstream fund, it is time to stay on course and investors have largely remained that way. It is reflected in the consistent inflows into equity fund through 2011.
Whereas there is a serious case that via equity allocation, they need to be increased for 2011. Is there a case to also increase allocation to debt because if interest rates they correct which they will in 2012, debt funds will also surprise you?
Yes, it is going to be another good year for debt funds. Of course internal dynamics of debt funds will change. It will be unreasonable to expect the same kind of return what investors got from the liquid fund or the short term fund or the ultra short term fund. Those returns are unlikely to be met, but what I feel is that income funds will come on the forefront.
There will be an appreciation component and that gain will start or has already started in a certain sense with the change in outlook for the interest rates, but I do not think investors should behave, Indian investors typically they work in a fairly binary fashion. They either are fully into equity or fully into debt.
That is very undesirable way of allocating because you normally do it at the wrong time. Once the equity values are down, then you move to debt. I do not think one should behave that way. Fixed income should be part of anybody's allocation, but should one be heavily into debt because there are good times ahead? No, equities turn around when you least expect it and be prepared for the unexpected.
The positive surprise last year came in from global schemes run by several AMCs like a Birla Sun Life International gave an 8% return in 2011. How much allocation should investors have to such funds in their portfolios considering that local markets are likely to remain bearish at least towards the start of this year?
International funds do present a case and the fundamental case for international fund is that the reason why you invest in a mutual fund is to diversify and with these funds, you will be able to diversify across geographies. It just takes one step ahead. But the problem has been that the kind of funds available to Indian investor, the absence of a diversified vehicle.
We hardly have only the Birla Sun Life or the Principal Global Opportunity Fund. They are the only diversified vehicle. Otherwise everything is something exotic. You get a Brazil fund, you get a Latin America fund or you get specific geography or specific commodity, agriculture fund and things like that.
The absence of generic diversified vehicle which helps investors diversify across geography is not available, but it presents. Why it has not taken off so far in all these years, they have been available. Because Indian markets have done consistently well, have been through a bull phase ever since these were made available, but 2010-2011 is a reminder that you need to diversify and it could well be up to 25-30-40% and not necessarily from the viewpoint that outlook is bleak for India. It should be a fixed component. You just need to diversify for your returns to be more consistent.
What about gold ETFs because they have jumped a good 31% last year? What should be the percentage in the total corpus when gold has already surged each year for the past 11 years?
It was very difficult to resist gold and it should be a very small component, not exceeding 5-7%, but so far it has been that investors, what to see of investors even politicians in Tamil Nadu had needed gold in their manifesto to win.
2011 has been a sort of write off for equity investors. What should they be doing with their fund portfolios right now? Is this the time for a cleanup and if yes, which funds should be done away with?
No, I do not think investors should be behaving in an erratic manner because one is faced with a declining value of the scale. One has to look at it, one should not lose the sense of proportion here. If you look at funds on an average, in fact 2011 was a year of contractions because we normally expect that large caps will be able to withstand a market decline much better followed by midcaps and small caps will see a massive erosion.
What we find is that small caps and midcaps were able to withstand the market decline much better than the large caps and large caps on every possible occasion or they were looking for an excuse to fall primarily because most of the big declines in a brief period came from FII actions. So that impacted large caps and that was visible.
That is why we see a little difference but investors need to really take lessons from 2011. If investors sided with funds, the emphasised funds in their portfolio which were not mainstream, for example the most popular fund in 2010 was the banking funds. Likewise in the year before that, investors still kept patience with an infrastructure fund which showed no symptoms and people are expecting for the good time to be back with those.
Investors have not exited these funds as aggressively as they should have in the hope that they will be able to recover even the money which came before 2008, that money stays there. So keeping away from anything which is stylish, fashionable and has lost its charm, investors need to really get out of those, but with a mainstream fund, it is time to stay on course and investors have largely remained that way. It is reflected in the consistent inflows into equity fund through 2011.
Whereas there is a serious case that via equity allocation, they need to be increased for 2011. Is there a case to also increase allocation to debt because if interest rates they correct which they will in 2012, debt funds will also surprise you?
Yes, it is going to be another good year for debt funds. Of course internal dynamics of debt funds will change. It will be unreasonable to expect the same kind of return what investors got from the liquid fund or the short term fund or the ultra short term fund. Those returns are unlikely to be met, but what I feel is that income funds will come on the forefront.
There will be an appreciation component and that gain will start or has already started in a certain sense with the change in outlook for the interest rates, but I do not think investors should behave, Indian investors typically they work in a fairly binary fashion. They either are fully into equity or fully into debt.
That is very undesirable way of allocating because you normally do it at the wrong time. Once the equity values are down, then you move to debt. I do not think one should behave that way. Fixed income should be part of anybody's allocation, but should one be heavily into debt because there are good times ahead? No, equities turn around when you least expect it and be prepared for the unexpected.
The positive surprise last year came in from global schemes run by several AMCs like a Birla Sun Life International gave an 8% return in 2011. How much allocation should investors have to such funds in their portfolios considering that local markets are likely to remain bearish at least towards the start of this year?
International funds do present a case and the fundamental case for international fund is that the reason why you invest in a mutual fund is to diversify and with these funds, you will be able to diversify across geographies. It just takes one step ahead. But the problem has been that the kind of funds available to Indian investor, the absence of a diversified vehicle.
We hardly have only the Birla Sun Life or the Principal Global Opportunity Fund. They are the only diversified vehicle. Otherwise everything is something exotic. You get a Brazil fund, you get a Latin America fund or you get specific geography or specific commodity, agriculture fund and things like that.
The absence of generic diversified vehicle which helps investors diversify across geography is not available, but it presents. Why it has not taken off so far in all these years, they have been available. Because Indian markets have done consistently well, have been through a bull phase ever since these were made available, but 2010-2011 is a reminder that you need to diversify and it could well be up to 25-30-40% and not necessarily from the viewpoint that outlook is bleak for India. It should be a fixed component. You just need to diversify for your returns to be more consistent.
What about gold ETFs because they have jumped a good 31% last year? What should be the percentage in the total corpus when gold has already surged each year for the past 11 years?
It was very difficult to resist gold and it should be a very small component, not exceeding 5-7%, but so far it has been that investors, what to see of investors even politicians in Tamil Nadu had needed gold in their manifesto to win.
Source: http://economictimes.indiatimes.com/opinion/interviews/2012-will-be-a-good-year-for-debt-funds-dhirendra-kumar-value-research/articleshow/11375646.cms
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