“There is value for the patient investors”

Over the last four years, the investment engine in India has slowed down owing to some domestic and global factors, but there is money to be made in long term, believes Ved Prakash Chaturvedi, CEO – Capital Markets and Investment Management, L&T Finance. “For an exciting market like India, it is difficult to say equity has lost its charm,” he said in an interview with Ritu Kant Ojha.

Excerpts:

The investors are losing patience with equity. Do you agree equity has gradually lost its charm over last three years?

The Indian equities market is being influenced by several factors — concerns about Eurozone, domestic inflation, interest rate and the rupee situation and a close watch of foreign investors on growth of our economy and earnings growth of various companies. In the near term it is expected that gloomy sentiment in business and investment and some headwinds from overseas markets and news flow may reflect in the market movement. However, the general belief now is that the worst period of our equity market is behind us and if some positive things fall in place, market sentiment may improve significantly. Thus, it is difficult to say that equity investing has lost its charm. Systematic, disciplined and patient investing in equity funds would create wealth in the long term.

Investors have not made any serious money over the last few years. Why should they continue investing in mutual funds?

Mutual funds offer a range of risk-return investment options in equity/ hybrid/ fixed-income securities. Investment in hybrid and fixed income funds have done well over the last five years. Owing to a combination of local and global factors equity funds have not performed. Medium term equity fund performance depends on performance of the economy and that of individual companies. But the engines of consumption, global business opportunities and financial intermediation are continuing to drive growth in their respective sectors. My sense is that the Indian economy will continue to grow at a rate significantly above that of other comparable economies. This will create medium term value for patient systematic investors.

There are 44 fund houses and 4,400 schemes. Do you agree that there is scope of merger of schemes, both in debt and equity mutual funds?

As any industry evolves, new entrants come in and launch a range of products to service their target investors. Some succeed in meeting investors expectations, others don’t and this has been the trend in the mutual fund industry as well. Over a period of time, the products in any industry get rationalised and the unsuccessful products fade away. In our view this is already happening in our industry. The good news is the meritocratic nature of competition and product selection by distributors and investors. This leads to natural selection and effective consolidation of products.

Do you agree there are not enough options available as far as investing in equity is concerned? Why isn’t there have been product innovation in India?

I feel that significant innovation has happened in India in the stock markets and mutual funds with evolving world class backbone for facilitating trades in our markets and similarly almost all instruments in the cash and forward markets are available here. Equity mutual funds offer a range of options namely, large-cap/ mid-cap/ hybrid/ thematic/ price-earning based etc. For the maturity stage of our market appropriate innovation has taken place. However, certain new products in the area of REITs, ETFs and hedge funds etc. will become popular in India in the future.

Source: http://www.indianexpress.com/news/there-is-value-for-the-patient-investors/971856/0

Consider these factors while picking a fund

Several people are convinced about using equity mutual funds as a preferred tool to invest, but they hit a roadblock when it comes to selecting the right fund. Some are promising, but new; others are established, but floundering. The advisers who clamour for trail commissions should be asked to demonstrate proven capability to select good funds for investors. We are not there yet primarily due to limited regulation on what advisers should do and how they earn their income. Investors end up buying funds based on past performance, which may not be repeated, as the fund houses themselves point out.

The focus for the investor should be on selection from the peer group, which these lists enable. A fund's performance may fall along with the markets in which it invests. Even the best equity fund may not post a positive return when the equity market return is negative. The decision at this point is an asset allocation decision-whether to remain in equity or not. It should not be confused with the fund selection decision, which is about choosing the right fund among peers that may be impacted by the market too.

First, there are funds for which you don't need to take a view; in case of others , your view matters. For example, if you buy a diversified equity fund investing in both large- and mid-caps , you leave it to the fund manager to take a view on the segment that will work well, and allocate accordingly. If you buy a fund that focuses on the mid-cap segment, you are going for a diversified portfolio, but are implementing a view on how midcaps will perform. Make sure you understand where you need to have a view and where the fund manager can do it for you.

Second, ensure you invest in the best. The simplest way to choose a good fund is to use its performance ranking. If your fund is 8/40, it is a top quartile fund (25% of 40 is 10, so funds up to the rank of 10 are top funds in this category). It is important to stick to funds that are above average, preferably top quartile funds. Check this ranking across time periods. This data is publicly available with fund research agencies such as Value Research . Funds that do not even beat the market index are not worth buying, but those that compete efficiently and stay ahead of the pack most of the time, are the favourites.

Third, do not look for consistency, that is, a fund that is always at the top of the league. In the 25-year history of competition in the mutual fund industry, there is no single fund that has stayed in the top quartile at all times. This is because different strategies work in different kinds of market cycles. Value funds, for example, will slip if the market is driven by growth. Slipping is not an issue, look for corrective action. Check how soon the fund bounced back after slipping . Your fund should stay in the top 50% mostly, not in the bottom 50% for over a year. In your yearly review, knock out the fund if it slipped for four quarters in its ranking.

Let's consider three qualitative factors to look for once you have chosen your fund based on peer ranking. First, the fund should clearly say where it will invest and how. Most fund objectives are hazy and fund managers tend to give themselves too much leeway on how they will generate returns. Without being too restrictive, if the fund says that it will invest in a diversified portfolio of equity shares, across sizes, it is good enough. To the investor, what matters is the manager's ability to select stocks carefully, manage sector exposure, and deliver a return that beats the benchmark index.

Second, the fund should demonstrate the ability to stay honest to its objective. Some funds are termed value-oriented , but most stocks they hold would not qualify . Some funds will tell stories about their ability to pick failing companies and turnaround stocks. These stories do not happen every day, and these funds degenerate to a diversified equity fund with a fancy name. Do not pick funds with vague objectives and strategies; they show erratic performance and corrective action is mixed.

Third, the fund house should have an investment philosophy that permeates most of its products. It is not possible for a fund manager to adopt diametrically opposite approaches to two products managed by the same fund house. If it has both value and growth products, see if the fund managers are different.

Some funds label such differences clearly and are transparent about how they function. In most cases, in order to push a new product, a fund house may come up with a fancy investment style, but not pursue it. Try and understand how the fund house does its job and choose the funds aligned to a stated philosophy . Ensure you buy into a specified, comparable, competitive product that is managed transparently. Review annually and replace laggards. Leaders fight to persist, but laggards always find the climb back tough.

Source: http://timesofindia.indiatimes.com/business/personal-finance/Consider-these-factors-while-picking-a-fund/articleshow/14759114.cms

Will a global fund add value to your portfolio?

Mutual funds offer investors the opportunity to participate in the growth of some of the country's largest and most profitable companies . There is no dearth of choice here since hundreds of domestic equity funds promise exactly this. At times, even the best of the lot gets weighed down. The Indian economy has been facing some problems and the recent performance of domestic equity funds mirrors this. However, not all funds are suffering. Many international funds seem to be doing well in an otherwise despondent market (see Impressive returns). For instance , Motilal Oswal MOSt Shares Nasdaq-100 ETF has delivered returns of 45% in the past one year.

There are a few global funds being offered in the country, with Motilal Oswal joining the fray just over a year ago, while Franklin Templeton Investments launched a fund a few months ago. Does this imply that the investors who are disappointed with the local market should add a global fund in their portfolio? Let's find out.

It's all about diversification

Being a growing economy with a powerful domestic consumption engine , we are spoilt in terms of expected returns from our investments. There is hardly any other country that provides such opportunities for investors. This is why firm believers in the domestic growth story may not want to invest abroad.

However, this strategy is not so much about the returns that your domestic investments are earning, nor is it about seeking higher returns elsewhere. The sole purpose of venturing abroad is to bring an element of diversification to your existing portfolio. The Indian markets may even go through extended periods of flat returns. So, it's a good idea to have some investments that bear little correlation to the domestic market. Besides diversification, another benefit that these funds offer investors is access to unique investment opportunities that are not available in India . While the Indian economy derives strength from several quarters, there are some areas where it falls short, such as technology, agriculture , commodities and defence. Investors can tap these opportunities available in a foreign market.

Watch out for

Global funds, much like their counterparts that are focused on domestic space, carry the usual risks related to the market, business, etc. However, there are additional dangers , the first being the risk of the unknown. There is a variety of factors , such as geopolitical and socioeconomic , that is unique to each country or region that can influence their performance. It is important that investors get a hang of such regional issues before investing abroad.

International funds also carry a currency risk. Though your investment is in rupee terms, you have exposure to foreign currency assets (the rupee is first converted into dollar and then into the local currency for investing abroad). This may or may not work in your favour. The sharp depreciation in the rupee against the dollar (more than 20%) has contributed to the rise in the NAVs of several funds in rupee terms. When you invest for only a short span of time, this can have a big impact on your returns. However , currency movements will have little impact when the investment is made for a longer period of time.

The options

If you are convinced about the benefits of having international exposure , follow the mutual fund route. International funds come in many flavours and each has its own set of advantages. For instance, some offer a region- or country-specific exposure and others offer a thematic exposure . Apart from the investment focus, global funds vary in terms of their structure. There are those that invest abroad directly and those that do so indirectly through underlying funds. The former category consists of funds that do not rely on an offshore fund manager and make investment decisions on their own, that is, a local fund manager handles the portfolio. Some such funds available currently are the Birla Sun Life International Equity Plan A, Tata Growing Economies Infrastructure Plan A and ICICI Prudential US Bluechip Equity. While these are actively managed, the Motilal Oswal Nasdaq-100 and Goldman Sachs Hang Seng BeES are the only exchange traded funds (ETFs) among international funds, investing passively in the same stocks comprising the USbased Nasdaq index and Hong Kongbased Hang Seng, respectively.

The other category of funds-those that invest abroad indirectly-operate either as feeder funds (those that pool in money from here and transfer it to the parent fund managed offshore) or pure fund of funds (those that invest the money in a basket of offshore funds). Dhirendra Kumar, CEO, Value Research, prefers the feeder fund route. "According to this route, your scheme is in the hands of a fund manager more in tune with that market."

All such international funds are treated as non-equity funds under taxation rules and attract debt taxation , unlike equity investments that are tax-free if sold after one year of investment. However, this means you can claim indexation benefits in the year of sale (20% with indexation and 10% without indexation).

Domestic funds are the first choice

International funds can play an important part in your portfolio as they widen the scope of diversification. However, the investment should be made not because it is the right time to do so or because the Indian equities are underperforming, but because it will lend a balance to your domestic investments in the long run. Venture out purely for the benefit of diversification rather than for higher returns. You need to stay invested in such a fund across market cycles , and not seek short-term opportunities based on any prevailing global or domestic economic scenarios .

Domestic funds continue to be the best vehicle to generate wealth over the long term no matter what the current situation might lead you to believe . The right mix of a few such diversified equity funds should form the core of your portfolio, while a suitable international fund can, at best, supplement your core holdings.

Source: http://timesofindia.indiatimes.com/business/personal-finance/Will-a-global-fund-add-value-to-your-portfolio/articleshow/14759106.cms