Indian funds have beaten Warren Buffett in returns, says Nilesh Shah

Indian investors are still in reverse track, Nilesh Shah tells ET Wealth. The good news is a more mature set of investors has entered the market in recent years.

A recent report says most actively managed mutual funds underperformed their benchmarks in the past five years. What are your observations?

Nilesh Shah: There's a saying that if you torture data enough, it will confess to everything. The SPIVA report is nothing but torturing of data. They have failed to appreciate that the worst performing Indian mutual fund outperformed Warren Buffett in dollar terms by over four times in the past 17 years. They also failed to appreciate that Indian equity fund managers outperformed the benchmark indices by double the margin by which Buffett outperformed indices in past 17 years. So we are outperforming the God himself, but you are torturing data to represent something that is untrue. All I can say is, please don't denigrate us and represent data to get sensational headlines.

You think all mutual funds have done their job well?

Nilesh Shah: As a mutual fund house, our job is to ensure that we take proper care of our clients' money. This could be in terms of outperforming the benchmark indices of the respective schemes. Fund managers are also human. They also make errors. If they keep on repeating those errors, there is cause for concern. In 2000, a lot of fund managers went wrong in picking companies. In 2008, a lot of us went wrong on the valuations. But at least the mistake of picking the wrong companies was avoided.

Equity funds have given good returns in the past 10-15 years. Why are investors still staying away?

Nilesh Shah: Indian investors were 45% owners of Indian equity in the early 1990s. Today, they own only 9-10%. While the market cap of Indian companies has soared, the Indian public has just sold off its stake. There are lots of Indian companies run by excellent entrepreneurs and managers. These people work hard but the fruits of their hard work are enjoyed more in Singapore, Hong Kong, London and New York, rather than in Ahmedabad, Bengaluru, Mumbai and Delhi. Indian companies are progressing but Indian investors are still in reverse track. If Indian investors had not sold off, HDFC and other great companies would still be Indian-owned.

Some portion of the EPF corpus will now be invested in stocks. What do you think of the development?

Nilesh Shah: It is a positive move. The investment philosophy followed by the EPFO for the past several decades has led to poor returns for investors. There are millions of subscribers who have been contributing to it for the past 15-20 years. By not investing in equities, they have remained poor. Imagine how much richer they could have been if some portion of their PF balance was allocated to equities 15-20 years ago.

Do you think equity fund investors in India have matured in the past 10-15 years?

Nilesh Shah: On one hand, there are investors who are happy with a reasonable return that beats the broader market. On the other hand there are investors who want to double their money in a very short time. They think that since fund managers appear on TV and other media, they are gurus. If a fund manager could predict with certainty where the market was headed, why would he work? A fund manager is not a wizard, he doesn't have a magic wand like Harry Potter. However, a more mature set of investors is now emerging. They are not too upset when markets don't do well. They understand that the downturn is transitional and try to gain from it by buying more at low prices. A growing number of investors is also realising the benefits of regular and longterm investing. There are 78 lakh SIP investors in funds today. We pray they continue and reap benefits of systematic investments in equities.

Source: http://economictimes.indiatimes.com/opinion/interviews/indian-funds-have-beaten-warren-buffett-in-returns-says-nilesh-shah/articleshow/47395888.cms

Don't switch out of debt funds

We have been recommending the long-dated debt fund strategy for some time now. While it has generated handsome returns in the past, conditions are not rosy for investors who got in only in the last three months. Income funds have generated absolute returns of only 0.97% in the last three months while the average longand medium-term gilt fund has lost money .

So what went wrong? After falling for more than 18 months, the 10-year yield remained almost flat the last three months before starting to inch up in the last few days. The 10-year yield is now placed at 7.87%, 22 bps higher than the recent low of 7.65% on 2 February . To find out where the yield is headed, we need to take a look at the factors that contributed to its recent spurt.

First, the spurt in crude prices from its recent lows has raised doubts about the low inflationary situation in India.Brent crude is at $69 per barrel, a more than 40% jump from its January low.However, experts think this spurt is temporary. "What is happening on crude is a technical bounce," says Rajeev Radhakrishnan, Head, Fixed Income, SBI Mutual Fund. This is because there is no reduction in supply by OPEC. "Crude should stabilise between $60 and $70. If prices go above $70, shale producers who shut down production may come back," says Radhakrishnan.

Food inflation is another worrying factor. A below average monsoon is predicted too. However, experts remain unfazed. "The corelation between monsoon and inflation is low," says R. Sivakumar, Head of Fixed Income, Axis Mutual Fund. "Food inflation is due to the increase in minimum support price and the government has made only a very small increase this time," he adds.

The CPI-based inflation, which the RBI uses, is still above 5%. However, the WPI-based inflation is in the negative zone for the last five months and should help bring down the CPI-based inflation.Growth not picking up as expected is another reason for a benign CPI-based inflation. "We are growing well below our potential rates. With enough spare capacity , manufacturer's pricing power is low and this should help inflation to shift lower," says Radhakrishnan. That would mean the RBI's CPI-based inflation target of 6% by January 2016 will be achieved. "Inflation should be close to 5% in the next year," says Sivakumar.

The weakness in the rupee is another factor holding the RBI's hand. The dollar has been appreciating over the last few months due to US rate hike fears and has already reached `64.05. Though RBI wanted a small depreciation in the rupee due to inflation differential, it would not like a sudden crash. Another factor irking RBI is the behaviour of banks, which have not passed on the benefits of the last 50 bps cuts to custom ers. However, the banks have started passing on some benefits. With more banks participating, RBI may restart rate cutting soon. "The next rate cut from RBI may happen before June 30," says Kumar.

The spike in 10-year yield can also be linked to technical factors in the market. RBI is about to issue new 10-year papers, so existing investors are getting out of current ones. "The yield on the existing 10-year paper is high because of the illiquidity premium and the yields on new papers are usually 15 bps lower than the old papers," says Indranil Pan, Economist, Kotak Economic Research. With the FII limit on government securities reached, there is no additional FII inflow here. Any increase in limit will result in fresh bout of buying and bring the yield down again.

Experts are of the view that the 10year yield will come down in a year."The current yield of 7.95% is an aberration and should come down to 7.25% in 5-6 months," says Kumar. Sivakumar and Radhakrishnan agree.

Stick with long duration: Investing in long duration funds is the best strategy to make money from a fall in interest rate. The price of bonds and yield are inversely co-related and bond prices move up when yields go down.Existing investors should stick with long duration funds instead of shifting.They can also consider putting in fresh money into this segment. However, note that the current yield is below 8%."Only investors with long-term holding period and strong views can make money this year," says Pan. "There will be short-term volatilities in long duration funds and instead of selling, they should hold on," says Vidya Bala, Head, Mutual Fund Research, FundsIndia.

Gilt or income: "Income funds are better for retail investors, as gilt funds are for those who have specific views on gilt yields," says Sivakumar. The advantage of income funds is that they can get the benefit of the higher yield in corporate debt papers also. Income fund managers usually invest in corporate debt when the difference between the gilt yields and AAA rated corporate bonds are high and get back to gilt then the yield difference is low. Pure gilt fund investors, who time the gilt yield cycle correctly, may also have to deal with higher taxation. The Indian gilt yield cycles takes 18-24 months. Since the minimum holding period for long-term capital gain for debt funds has been increased to 36 months, active investors who exit before three years will have to pay short-term capital gains tax.

Short-term for stability: Investors who seek stability can go for short-term income funds. Here the returns come through the accrual method. These funds have generated decent returns in the past year. However, short-term rates are expected to fall. A better option are dynamic funds, where the fund manager takes the call on maturity based on his reading of interest rate movements.

Source: http://timesofindia.indiatimes.com/business/india-business/Dont-switch-out-of-debt-funds/articleshow/47410775.cms

Time To Tank Up

"Investors are switching to equity and debt funds to cash in on the stock market rally".

Adarsh Shamdasani, 35, general manager at a Mumbai-based export company, invested only in gold and fi xed deposits to build her wealth. She did dabble in equities and debt mutual funds a few years ago, but was quick to retract. "Gold and fi xed deposits have been the safest investment options for me and I have stuck to them," she says. However, of late, Shamdasani has been toying with the idea of making her debut as a 'serious' investor, given the improving macroeconomic conditions and the subsequent rally in the stock market. "With reducing interest rates, equity and debt mutual funds seem to be a more attractive option," she quips.

Shamdasani is not alone. An increasing number of Indian investors are trying to make the best of the stock market rally. This is evident from the fl ow of Rs 62,500 crore in equity mutual funds between March 2014 and February 2015. The value of assets held by individual investors in mutual funds increased to Rs 5.52 lakh crore in February 2015 from Rs 3.93 lakh crore in the past one year. Says S. Naren, CIO, ICICI Prudential AMC: "The spur in economic activity and poor performance of other asset classes, such as real estate and gold, in the recent past have contributed to it."

After years of stupor, the Indian stock market rally saw the Bombay Stock Exchange (BSE Index) rise by 27 per cent after the NDA government came to power at the Centre with full majority. While equity funds have done even better with the category average returns ranging from 35 per cent to 75 per cent, debt mutual funds also gave 25 per cent returns, compared to gold funds losing nine per cent during the period.

MARKET RALLY TO CONTINUE

Naren feels equities will continue to do well. "The government's reforms initiatives have set the stage for a virtuous economic cycle which will boost corporate earnings," he says.

Market valuations are a factor of earnings growth, hence current valuations may seem high due to poor earnings growth in the corporate sector. Profi t growth for 2014/15, for instance, collapsed to 4-5 per cent, which is lower than the average of the last four to fi ve years. Even though the stock market is trading at about 17 times one year forward earnings, which may appear expensive prima-facie, given the historical average of 14 to 15 times, in the current scenario, the valuations are not expensive," says Pankaj Pandey, Head of Research, ICICI Direct. During the peak of 2008, markets were trading at 18-20 times one-year forward multiples, leaving enough room for expansion.

Going forward, a pickup in earnings growth will depend on the speed with which government reforms are implemented and capital expenditure is undertaken. Naren says the Indian economy is in a much better shape, since current account has been improving, infl ation is on a downtrend, forex reserves are much higher and growth impulses are picking up. The actions taken by the government is likely to start refl ecting in corporate earnings over the next three to four quarters, with a consensus among market experts at 16-20 per cent profi t growth for 2016/17.

According to I.V. Subramaniam, Managing Director and Chief Investment Offi cer, Quantum Advisors, investors entering the market now must be wary and invest with a longterm orientation as there is risk of near-term underperformance. "If one does not have the skill set to analyse stocks, avoid direct investments. Instead, use the mutual fund route and do not get carried away by near-term favourites," he adds.

Mid-cap funds, for instance, have given over 70 per cent returns in the last one year, which can be attributed to the fact that these funds take incremental risk by investing in high-beta stocks, which allow multi-fold returns. It is diffi cult for large-caps to mimic mid-cap funds. The other factor driving mid- and small-cap stocks is the enhanced liquidity. Typically, liquidity drives mid-cap stocks more easily than large-caps. However, during a bear phase, these stocks fall steeper than large-caps.

According to Subramaniam, investors should maintain their core portfolio into large-cap funds, while mid- and small-caps should form a smaller portion of their portfolio. Further, with mid-caps running up twice as much, easy stock picking is behind us. Hence, choosing a fund wisely is more imperative now than before. Investors should look at fund performance through various cycles and its performance vis-a-vis its benchmark. Unlike large-cap funds, which make alpha from sector selection (for example, being overweight on the banking or pharmaceutical sectors, etc.), mid-cap funds make alpha on the basis of stock selection. Therefore, while choosing a fund it is critical to see who is the fund manager and how his performance has been over the years.

Says Vinit Sambre, Fund Manager, DSP BlackRock: "Retail investors should incrementally look at allocating higher share to equities as it is likely to outperform all other asset classes in the next 3-5 years." The other advice will be to follow strict discipline in terms of equity investments and avoid low- quality traps. Investor participation in stock market usually increases as valuations rise, which should not be the case. "It may be prudent to add funds in the balanced, dynamic or asset allocation category as they seek to increase allocation to equity when the markets are cheap, and book profi ts in equities when markets are rising, thereby, reducing volatility and boosting returns," says Naren.

SECTOR PREFERENCE

Pandey of ICICI Securities is bullish on domestic sectors such as automobiles, cement, capital goods and banks. According to him, defensive sectors such as FMCG, pharma and IT could perform in line with the broader market. He maintains his December 2015 Sensex and Nifty target of 32,500 and 9,750, respectively. Ridham Desai, Managing Director and Head of Research at Morgan Stanley, estimates a 24 per cent CAGR in Sensex earnings in the coming two years compared with 17 per cent estimated by the bottom-up consensus. He is overweight on private sector banks, industrials, discretionary consumption and technology. Naren believes highly leveraged segments are likely to do well considering a 50 basis point cut. It will reduce the interest burden of leveraged companies. Many highly leveraged companies did badly relative to the rest of the market, and some of them are wellpoised to make the most of the lower interest rate cycle.

Debt-ridden companies may not necessarily have the best fi nancials or the best balance sheets now and, therefore, it would require intensive research to narrow down to specifi c companies. "Financials is another area that looks quite promising.

Public sector banks require capital and, over time, lower interest rates should benefi t banks as it will improve growth and reduce nonperforming assets. A combination of lower interest rates, lower NPAs and capital infusion are extremely positive for the fi nancial sector," adds Naren. Visibility on capex revival through increased government spending and addressing issues of fi nancing infrastructure projects could also benefi t certain sectors in the infrastructure space.

TRENDS IN INCOME MUTUAL FUNDS

Fixed income, too, offers good investment opportunity. According to Pandey, outlook for the bond market turned positive in 2014 on the back of attractive levels of government security (g-sec) yields after continuous sell-off and improving macroeconomic data. The sharp fall in consumer prive index (CPI) infl ation coupled with favourable global and domestic macroenvironment, such as softening global commodity prices, a stable rupee, and comfortable fi scal and current account defi cit, have led to increased expectations from market participants about rate cuts by the Reserve Bank of India. Increased and sustained foreign infl ows in the Indian debt market also improved market sentiments, leading to increased domestic participation in income funds and g-sec funds.

What is likely to decide the income trajectory from here on is the CPI or retail infl ation, which is the key driver for interest rates to ease. According to Rahul Goswami, Chief Investment Offi cer, Debt, ICICI Prudential AMC, interest rates are likely to decline by another 50 bps over the course of this year. The 10-year g-sec yield is currently hovering at 7.75 per cent and could fall to seven per cent mark in about a year, making debt attractive. Falling interest rates and yields are good news for bond investors as interest rates and bond prices share an inverse relationship: any fall in rates and yields lead to an appreciation in bond prices, and vice versa.

Says Santosh Kamath, Managing Director, Local Asset Management, Fixed Income, Franklin Templeton Investments, India: "Debt mutual funds offer an attractive alternative to traditional savings instruments due to their return potential and tax advantages. Some of the other key benefi ts of mutual funds are professional management, diversifi cation and easy access to liquidity at a fraction of the cost of buying debt instruments individually to build such a portfolio.

Source: http://businesstoday.intoday.in/story/investors-eye-equity-debt-funds-benefit-from-stocks-rally/1/219657.html

Volatility counts while picking equity mutual fund schemes

One of the best investment options is to invest in mutual funds. Mutual funds investments through SIP provide good returns in the long run. However, when you are investing in equity funds, you should look at volatility (risk) factor. What is this volatility factor in Equity fund? In this article, I would provide some insights about volatility in equity fund and how an investor can understand it in simple terms.

Why it is important for an investor to look at volatility in equity fund?

Stock market reached peak in the last 1.5 years. You may not see such peaks every year. Foreign investors are pumping money into the Indian stock markets. Small cap stocks and mid cap stocks are zooming like anything. We see some market corrections now and then. In such case, it may be a risk in investing in stock markets at this point of time. If you are investing in equity funds now, you do not know whether you would get good returns in future. Investors generally look at the high returns track record and invest in such funds. Many investors look for higher returns rather than ranking and the volatility of the fund. Exceptional gains in short term period would hide the poor performance of the fund.

Hence, you should understand volatility risk in equity funds to have a better picture of your equity fund investments.

How to measure it?

Mutual fund volatility risk can be measured by various ways like Alpha, Beta, R-Squared, Standard Deviation and Sharpe Ratio. However, it is difficult to understand for normal investors to go through the formula and check for each and every scheme. I would tell you how to measure volatility of equity fund in simple terms.

Large cap equity fund – volatility is somewhat moderate

Mid-cap equity fund – volatility is generally high

Small-cap equity fund – volatility would be very high

As an example, if you are investing in a good small cap fund, when markets are rising, returns from such a small cap fund would be higher than a large cap benchmark such as SENSEX or NIFTY. Similarly, when markets are falling, small cap funds would tend to fall at faster speed than the benchmark indices.

Then, how should we invest in equity funds?

There are few factors you should consider while investing in equity funds.

Invest more in large cap funds than in mid-cap or small cap funds especially during peaks.

During rising markets, mid-cap and small cap funds tend to do better.

Choose funds that have done well in bear markets too.

Look for consistent performers rather than short period upswing.

Avoid funds which came in last 3 years. Performance in various market cycles is not yet known.

Do profit booking for mid-cap/small cap funds during market peaks as they tend more volatility during market corrections.

Source: http://www.moneycontrol.com/news/mf-experts/volatility-counts-while-picking-equity-mutual-fund-schemes_1391051.html