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00:00 Hi, thanks so much for tuning in.
00:11 You're watching the Mutual Fund Show on NDTV Profit and my name is Alex Mathew.
00:16 Let's talk about what the show is all about.
00:19 It is in fact the show that gets you actionable insight on everything mutual fund related.
00:24 On today's program, we're discussing fixed income mutual funds and whether or not you
00:29 should opt for corporate bond funds or in fact look at credit risk funds which have
00:35 fallen out of favor as you know.
00:38 Is it the right time to reconsider whether to invest in those or not?
00:43 And then we'll talk about actively managed mid-cap mutual fund schemes.
00:47 They've seen significant inflows right from the start of last calendar year and for very
00:52 good reasons.
00:54 They've seen significant outperformance as well but as in life, in mutual funds you have
01:00 winners and losers and on today's program, I'd like to talk about the underperformance
01:05 in that period of time.
01:07 There are a few schemes that are underperformed over a three-year period as is the case in
01:12 most categories.
01:13 We'll talk about the reasons for those underperformances and we'll talk about whether or not you should
01:19 consider removing these schemes from your portfolio or whether patience would hold you
01:24 in good stead instead.
01:26 Let's introduce you to the guests for today.
01:29 We've got Santosh Joseph who is a founder of Germinate Investors Service and we've got
01:34 Rushab Desai who is a founder of Rupee with Rushab Investment Services.
01:38 Thank you so much to the both of you for taking the time as always.
01:41 Santosh, I'll start with you on the fixed income conversation and really what I wanted
01:47 to start with is active versus passive and I want to talk about the slightly longer term
01:54 options in the segment of fixed income.
01:57 How do you first of all choose whether you want to go the active route or the passive
02:01 route?
02:02 Well, to begin with, if you clearly know that passive is for you, that's when you choose
02:09 the passive but in an active fund, you have the luxury of the fund benefiting with the
02:16 significant amount of dynamism that is there in the market.
02:19 Therefore, the simple answer between active and passive would be if the client already
02:24 has got a well thought out or defined strategy that why he's looking at passive and how this
02:30 is going to help him meet his financial goals.
02:33 If not, it's always better and also recommended that you be in active strategies because in
02:40 the active strategy, the dynamism, the real time activity of the market ground realities
02:46 is factored in and essentially goes on to benefit the client a lot more than just the
02:51 difference between active and passive thought.
02:54 That's a fair point.
02:55 I want to show you also to come in on this because and the reason I ask is because you
03:01 have FMPs, fixed maturity plans and target maturity plans or rather in fact, more the
03:07 latter than the former target maturity plans because of the flexibility that they offer
03:13 you that have come to the fore in the recent past and by recent past, I'm talking about
03:18 the last couple of years or so.
03:21 Do you also believe what Santosh is saying?
03:24 Is that the case with you as well?
03:26 Alex, thanks so much for having me on the show.
03:30 Yes, absolutely.
03:31 I do agree with Santosh that active segment in the debt mutual space, debt mutual fund
03:37 space has more merit because the fund manager can take active calls in terms of what bonds
03:44 to buy, what bonds to sell and because these bonds are also traded, it's very important
03:48 that the fund manager can take full advantage in the secondary market as well.
03:55 In the active segment, the fund manager also can take duration calls and credit risk calls
03:59 as well.
04:00 So I think active debt products will do much better rather than the passive in terms of
04:08 delivering better risk adjusted returns.
04:11 But to simply put it that if a client doesn't understand all of this, then of course a passive
04:16 route, a simple roll down strategy works best as well.
04:20 But also it's very important that because even the active space, we have different products
04:25 of different duration as well.
04:27 So it's very important to match your time horizon and the duration of the product.
04:32 And especially it's also very important to understand the interest rate cycle as well.
04:36 So if someone understands the active side, all the market cycle and the debt market space
04:45 well, then I would definitely go for the active debt products rather than the passive ones.
04:50 Okay.
04:51 Santosh, I'll come back to you and talk about, and I know that this has been talked about
04:56 quite a bit, but since we're talking about fixed income, because of the change in tax
05:00 treatment of fixed income mutual funds, we're talking about the longer term strategies that
05:06 have now, they don't longer get that indexation benefit and they're not treated as long term
05:12 capital gains at all.
05:14 So from that perspective, I think a lot of people have gravitated towards other products
05:17 even outside of the mutual fund industry.
05:20 Is there still a considerable merit in holding fixed income mutual funds as part of your
05:26 overarching strategy in your asset allocation strategy?
05:32 There's no doubt on that.
05:33 I agree that the taxation took the zing off of the luxury that mutual funds gave and no
05:39 doubt that capital gain and indexation was a huge benefit to the entire debt segment
05:43 of the fixed income industry.
05:46 Now when you look at a well-managed dynamic fund, now whether it's in the corporate bond
05:51 space or even in the credit risk management space, there is so much of alpha that can
05:57 be generated for an investor in a well-managed fund.
06:01 Risk management, alpha, convenience, liquidity, you know, these are all those simple things.
06:07 They become priceless and very valuable for an investor in his journey towards, you know,
06:14 projecting wealth, building wealth and also creating a very stable portfolio.
06:18 So though we missed out the edge of taxation, we still have the benefit of the product itself
06:24 being superior.
06:27 Rishabh, coming on this as well, what do you tell your clients to do with regard to their
06:35 longer term strategies on fixed income?
06:38 See, currently we are at the peak of the interest rate cycle, Alex, right?
06:43 So I think medium to long duration funds or bonds would work well.
06:48 A lot of people, you know, tend to forget this, that mutual funds, especially debt mutual
06:54 funds and market link products, right?
06:55 The bonds are traded on the secondary market, right?
06:58 So they are always going to have a higher edge than the traditional bank FDs.
07:05 The reason is because, see, the bond yields, right?
07:10 And the bond prices are inversely related.
07:12 So when the yields in the market or when the interest rates in the economy starts to fall
07:16 down, the existing prices of the bonds, which are of the higher coupon, they will be, you
07:23 know, they will give you higher returns than what they are currently giving.
07:27 So since even though indexation benefit has gone away, because these products are market
07:32 linked, I think currently at the peak of the interest rate cycle, it makes more sense,
07:38 you know, for investors to invest a higher allocation towards, you know, market link
07:43 products like debt mutual funds.
07:45 And also at that too, you know, investing in medium to long duration funds will have
07:50 more merit at this point of time.
07:52 Got it.
07:53 All right.
07:54 So then let's get into corporate bonds, credit risk funds, as well as target maturity funds.
07:57 And target maturity funds, of course, is that passive strategy that we were talking about
08:01 at the start.
08:02 Santosh, quickly, your view on how to approach these three.
08:05 Would you advocate getting into any one of them?
08:08 Well, see, all three are distinct.
08:10 Now I think the simple way to solve these two is quality of credit and the time frame
08:15 that one is looking at.
08:16 Now in a corporate bond, the bonds are stable, you have certain predictability and there's
08:22 a end benefit.
08:23 In a credit risk fund, you're compromising a little bit on the credit quality, but then
08:28 you're playing for the upside that is potential.
08:30 Now in a target maturity product, you are actually trying to see if you can get better
08:36 return than an FD.
08:38 So basically you have a nice spectrum between the three, where on one end you have corporate
08:43 bond, in the middle you have the target maturity and towards the other end you have credit
08:47 risk.
08:48 Now if you are looking for high returns, you of course go for credit risk.
08:52 If you're looking for stable, but also in time, you don't want variability, then you
08:56 go for targeted maturity, whereas you want top quality and you're okay with a little
09:01 bit of variation in time, then you stick to good quality rated corporate bond funds.
09:06 Anything to add here, Rishabh on this one?
09:10 Alex, I'm not a very big fan of the credit risk category, unfortunately.
09:15 I'll give you some data.
09:16 I pulled out some interesting data.
09:19 So from 1st of January 2019 to 6th of February 2024, on a three year daily rolling returns
09:28 basis, corporate bond funds actually outperformed credit risk funds 75% of this period.
09:35 That's a huge number, right?
09:37 Now during this period, the average CAGR returns generated by corporate bond funds, this is
09:43 on a three year daily rolling basis, Alex, is around 7.4% by corporate bond funds and
09:49 credit risk funds on an average generated around 7%, right?
09:54 Now for calculation purposes, I took four popular funds from the corporate bond category,
10:00 which is Aditya Birla, HDFC, ICICI, Kotak, and from the credit risk space, HDFC, ICICI,
10:08 Kotak, and SBI.
10:10 Now unfortunately, now one might argue that, okay, the cost factor, like the expense ratio
10:15 can play a very important role, but let's go to the YTM, the yield to YTM, the yield
10:20 to maturities, which is at the gross level now.
10:22 So credit risk funds are giving only 0.7 to 1% higher gross YTMs than corporate bond funds.
10:32 Now I always tell this to my clients that if you want to take risk, go into the equity
10:36 segment because fixed income space can be more riskier than equities at times.
10:41 So fixed income has to be treated for capital protection, preservation, and steady appreciation.
10:48 So because there seems to be no merit from the data, what I've just mentioned in the
10:53 credit space.
10:54 So definitely credit risk funds are a big no and corporate bond funds are a big yes
10:59 from my side, Alex.
11:01 Since the start of 2023, mid-cap mutual funds, and I'm talking about actively managed mid-cap
11:06 mutual funds, have received thousands of crores of inflows on a net basis.
11:12 And we've looked at some of the outperformers, but I think it's also important to look at
11:17 the underperformers.
11:19 And we've identified a few of them on a three-year annualized basis.
11:23 And look, it's always the case, you look at any time frame and you'll find winners and
11:28 losers.
11:29 What we want to identify is whether or not you should do something with this information
11:34 and if at all, what you should do about it.
11:37 What we found is that DSP mutual fund in the mid-cap category, Sundaram, LIC, Axis, as
11:43 well as Franklin India, have relatively underperformed.
11:46 We'll try and figure out whether this has to do with the strategy and the outperformance
11:53 of certain pockets that have led to the outperformance of other strategies.
11:58 Santosh I'll come to you first on this.
12:01 Of course, you look at value versus growth and I think that's the first thing that one
12:06 would talk about where one has performed and the other has gotten hammered a little bit.
12:11 But does anything stand out as a commonality between these five schemes that I've chosen?
12:17 I think you said both the points in your question.
12:20 One is the relative underperformance, second is the value versus growth.
12:23 Now if I were to break that down further, the last two or three years, the clear differentiation
12:30 has been your exposure to PSUs and within the mid-cap and small-cap, the difference
12:35 between value and growth.
12:38 Now I also like to try to look at these funds from a seven-year, eight-year, ten-year performance
12:44 for the guys who do have a ten-year track record.
12:46 They're not bad.
12:48 In fact, on an average, any mid-cap that's got a ten-year track record, the return sits
12:52 at over 18 or 20%.
12:54 Now when you look at the return standalone on a three-year basis, these are between 15
12:58 to 19%.
13:00 So there is relative underperformance largely because of the style of investing and the
13:06 positioning of the fund.
13:08 So though it is a little bit disappointing if you're an investor in this fund versus
13:12 the funds that have done relatively so well compared to these funds, but I think you have
13:18 to look at it from a slightly more larger perspective about the style orientation of
13:22 the fund and the long-term activity of the fund being invested maybe in growth or maybe
13:28 not in value or maybe not in PSU.
13:31 So there is merit if you look at it from a slightly longish point of view because these
13:35 funds are not bad.
13:36 They do have a significantly better five-year, ten-year performance track record.
13:42 And these kind of style biases and even sectoral weights or even team weights can hurt you
13:48 in a two to three-year performance.
13:49 Santhosh, and I'm so glad that you pointed that out.
13:52 The reason I selected three, because my natural instinct would have gone to at least five.
13:58 The reason I've selected three is because you as well as all our viewers also will know
14:02 about this, the number of investors that have come into the fold over the last three years
14:07 and they will have witnessed this performance.
14:10 So it's important for them to understand based on what they're seeing on their screens and
14:15 relative outperformance of perhaps their neighbor selections, what they should do with it.
14:20 So do you have anything to add on that, Rishabh, in terms of these particular schemes?
14:25 Alex, you absolutely put it quite well.
14:29 You know that because a lot of investors, what happens is they look at past performance
14:33 of these particular funds and they venture into these funds looking at the great outperformance
14:38 what these funds have delivered.
14:40 I do agree that these funds have had a great track record since their inception.
14:48 But unfortunately, recently, since past a couple of years on a seven to 10-year daily
14:53 rolling basis, returns basis, all of these funds are unfortunately struggling to give
14:58 out performance.
14:59 Now, if you see the entire mid-cap category, Alex, apart from these funds as well, there
15:03 are so many funds which are underperforming on a five, seven, and a 10-year returns basis.
15:09 Now, see, three years, again, is a very short duration to measure an outperformance and
15:14 underperformance.
15:15 And even on a five-year basis, a fund is very, very natural that a fund can underperform.
15:21 On a seven-year basis, probably a cyclical product may underperform.
15:26 But I feel that if a fund, on any fund, whether it is of a value strategy or a growth strategy,
15:33 it underperforms on a 10-year basis, it's something to be concerned of and it's something
15:37 to be worrying, right?
15:39 So I think apart, I honestly don't recommend these funds apart from Axis Mid-Cap Fund at
15:45 this point of time, mainly because Shreyas has been with these funds since the inception
15:54 and he's been managing it quite well.
15:56 We have seen management changes in Sundaram, in LIC, in Franklin at this point of time.
16:04 So I would not recommend additional inflow at this point of time in these funds, but
16:10 one can look at other consistent performing funds, for example, like EagleWise Mid-Cap
16:16 or Kotak Emerging Equity at this point of time.
16:18 Also, one more thing, Alex, I would like to mention is that investors can start looking
16:23 at smart beta Mid-Cap Index funds.
16:28 I pulled out some very interesting data that Mid-Cap 150 Momentum 50 Index, it has outperformed
16:36 on a 10-year daily rolling basis since its inception vis-a-vis the Nifty Mid-Cap 150
16:42 TRI Index.
16:43 So it's high time that fund managers and the AMCs pull up their socks, especially from
16:48 a 10-year perspective, otherwise, smart beta index funds would also do great.
16:53 Yeah, fair point.
16:54 Last thought, Santosh, on this very quickly, I think you've already made your point, but
16:58 any call to action you would give as Rishabh has just done?
17:02 See, I think there are two points to this.
17:05 Number one, do you trust your portfolio manager or the fund manager who's now in the helm,
17:14 being able to manage this downturn in terms of performance, though relative, can he be
17:19 able to pick up when the tide turns for him?
17:22 Or is there reasons that you believe that even if the markets were to pick up, the fund
17:26 will not pick up?
17:27 That's the first question that you'd ask yourself.
17:29 The second thing that you have to ask yourself again in this portion before you take a call
17:35 on to continue, not to continue, to even to investors, that the underlying portfolio and
17:42 the market performance and what you want out of it, are the three in line?
17:48 Because there are some times where even though there's a relative underperformance, the portfolio
17:52 manager is not keen to make changes or he makes so much changes that even in future,
17:58 you're finding it difficult to capture that performance.
18:00 So the only time that you can make an easy decision in a tough situation like this is,
18:07 is there some good activity or comfort that you're getting from the fund manager saying
18:12 that even though on a three year basis, I've not made as much as returns as the market
18:17 has given or the peer group has given, but can I continue to trust the fund manager and
18:22 you know, play for a bounce back?
18:23 That's the most critical part.
18:24 All right, gentlemen, we have time for a couple of queries, hopefully.
18:29 The first one I will take is from Shrikant and he's asking on behalf of his father.
18:34 He says that his father is retired, aged 65, has an amount of 50 lakh that he's invested
18:40 in Sundaram FlexiCap and MidCap funds put together.
18:44 Now he's not named the MidCap funds that he has invested in, but he's asking essentially
18:50 whether or not these should be held on to.
18:53 This is a lump sum investment that was made in 2021 and he's earning a monthly income
18:58 of over one lakh through property rentals as well.
19:02 Is it advisable to transfer to debt based or debt based funds in the fixed income spaces?
19:08 This is essentially what we've discussed today.
19:11 So what I'm understanding from that is, do you remove some of the investments from equity,
19:16 some of the gains from equity and reallocate towards fixed income?
19:20 Santosh, I'll come to you.
19:21 Well, it looks like a good investor who's got some money and income coming from though
19:26 he's retired.
19:27 I'd go with a slightly more practical approach saying that this money should continue the
19:32 way it is, not essentially remove money because the markets have made you money since 2021.
19:38 Because I think now if you're an investor in 2021, there'll already be a reasonable
19:41 amount of gains, whether in a MidCap or a FlexiCap fund.
19:44 I think you should let it continue.
19:46 The reason you move out of this or book profits is only when you know that you're uncertain
19:51 about where the market is going and you need income to be drawn from this or you need some
19:55 accrual to benefit for your monthly or your life sustenance.
19:59 There is no clear vision whether the person needs money from this for sustenance.
20:04 So I think you've done a good job by investing and you should continue.
20:07 If ever he's worried, he can move to a little more conservative approach like a balanced
20:11 advantage fund.
20:13 But there's no reason to panic and move into debt funds.
20:17 That's the view.
20:18 Second question is coming from Sameer Kankal.
20:20 He's writing in from Oman.
20:21 He says he's 49 years old.
20:23 He wants to invest 50,000 rupees per month and a 20 lakh lump sum in mutual funds.
20:28 He's looking for a steady fund to invest in and he's anticipating returns of 12 percent,
20:34 I would think, on a long term compounded basis.
20:38 He currently has investments worth 40 lakh out of which 2 lakh are in mutual funds and
20:43 he's looking to convert his shares into mutual funds for long term and steady income.
20:48 His goal is income for retirement and he's looking to retire as early as 2026 and for
20:54 income to start in 2027.
20:55 Rishabh, unfortunately I'm not giving you too much time to answer this.
20:59 Alex, you know, to generate 12 percent CHA returns in a very short duration, it's going
21:06 to be a tough job looking at the current markets at this point of time.
21:09 I would request him to have a little longer time horizon before he starts the redemption
21:13 process or the SWP process.
21:15 Probably give it around five to seven years time frame and then see how the equity segment
21:21 performs and then probably start the withdrawal process.
21:27 You know, at this point of time, he's not mentioned a lot of things where his 40 lakhs
21:31 is currently, whether it is in equity or debt, I'm not too sure.
21:36 But I can put it very simply that he can start an SIP of 50,000 rupees purely into the equity
21:43 space.
21:44 He can create a good portfolio of flexi-cap, mid-cap and small-cap funds.
21:50 I think that will be well sorted.
21:51 The 20 lakh lump sum investment he's planning to make, again, I'm not aware about how much
21:57 percentage allocation is in equity or is in debt.
22:00 If that 20 lakhs is a reinvestment corpus, you know, from his shares, looking into the
22:07 mutual fund space, then I would recommend to go in equity, pure equity mutual funds
22:12 at this point of time.
22:13 But again, I would not suggest to retire this early because life expectancy has, you know,
22:19 become longer, people are living for 80, 85, 90 years.
22:23 We have greater healthcare and plus inflation is also eating up our pockets.
22:27 The standard headline inflation is not the same for everyone.
22:31 So that's what I would recommend at this point.
22:34 Fair point.
22:35 And there are a few questions that I have of Sameer as well.
22:37 Perhaps we can get on a call with him and get some of those clarifications and come
22:41 back to you for a more pointed answer.
22:43 Thank you so much, Rishabh, as well as Santosh for joining in and for having that conversation
22:47 with me.
22:48 I think it's been a fruitful one.
22:50 Hopefully, my viewers think so as well.
22:52 That brings us to the end of this particular edition of the Mutual Fund Show.
22:54 It's been an absolute pleasure bringing it to you.
22:56 Do stay tuned.
22:57 Lots more coming up on NDTV Profit.
22:59 [Music]