• 6 months ago
Flexi-Cap Funds: If AUMs become larger, should investors switch to newer schemes?


My Wealth Guide's Salonee Sanghvi and Germinate Investor Services' Santosh Joseph share views.

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00:00 Hello, welcome to the Mutual Fund Show.
00:07 I am your host, Neeraj Shah, and today we will be discussing two topics.
00:11 One, if you are an investor in a FlexiCap fund, particularly a FlexiCap fund, and if
00:18 the AUMs of those funds, because of the stupendous performance in the last few years, have become
00:23 larger, would you or should you switch to some of the newer schemes, which are also
00:27 managed by reputed fund managers or AMCs, because it might be difficult for a fund with
00:35 a larger AUM to outperform relative to some of the smaller AUM funds.
00:40 So that's the first one on our radar.
00:42 Of course, a bit later on in the show, we'll also try and ask a question which invariably
00:46 comes up every three months or six months, but even more so now, that if indeed fixed
00:51 returns in bank deposits might be at a particular level, let's say 8% or 9%, is it prudent to
00:58 use them as opposed to try and invest in a debt fund at the current juncture?
01:03 To talk about both of these topics, I'm joined by two experts, Saloni Sanghvi, founder at
01:08 My Wealthguide, and Santosh Joseph, founder at Germinate Investor Services.
01:13 Both of you, thanks so much for taking the time out.
01:15 It's a pleasure to talk to both of you.
01:17 It's been a while that I've spoken to you, so great doing this show together.
01:22 I'll start off with the first topic, which is Flexicap funds in particular.
01:27 This could be applicable to any scheme, but I'm using Flexicap funds as an example, wherein
01:34 the size of the fund has become very large.
01:37 There is a Parag Parekh, which is an exceptional performer for the last seven, eight, ten years
01:41 maybe, and the fund size has now become very, very large, the equity AUM.
01:45 Especially for NHTFC or some of the others.
01:47 Saloni, can I start off with you on this?
01:50 That's typical, right?
01:52 As a fund size becomes higher, would it find it difficult to outperform, and therefore
01:56 should people look at smaller funds?
01:59 Thank you so much for having me, Neeraj.
02:01 So before we look at specific funds, let's look at some of the parameters that you would
02:06 look at to pick a fund to invest in, regardless of the category.
02:11 First is returns.
02:12 Now while obviously past returns are no indicator of future returns, it helps us understand
02:18 how a fund has performed across various market cycles.
02:22 Second is risk.
02:23 As important as return is, risk is even more important.
02:27 A fund could have performed well, but the manager may have taken excessive risk to achieve
02:33 that.
02:34 The third is obviously the fund manager's style, whether it's growth, value, quality,
02:39 et cetera.
02:40 Also consistency in case a fund manager exists.
02:45 And the last is AUM.
02:47 Now a small AUM could be an issue if there are large redemptions in the fund.
02:52 A large AUM would be more of an issue in small cap funds because it restricts the opportunities
02:58 available.
02:59 Given that most of the flexi-cap funds are often large cap biased with around 70 to 80%
03:05 in large cap stocks, I think the AUM, the large AUM is not a drawback.
03:11 And high AUM is obviously of course built on the back of good performance.
03:14 So if we were to just quickly look at the performance of some of the funds with the
03:19 highest versus the lowest AUM in the category, you know, if you look at Parag Parekh, which
03:25 you mentioned, that has outperformed the benchmark across most timeframes.
03:30 Whereas if you look at the funds which are in the lower AUM category, they've actually
03:35 underperformed the benchmark across most timeframes.
03:39 Now when we come to the specific fund houses that you mentioned, a track record helps to
03:45 understand the kind of risk that a fund is taking, how well it does in a bull market,
03:51 bear market, and because there's a lot of data available, you can analyze it and determine
03:56 if it is the right fit for your portfolio.
03:59 In a new fund or AMC, you only know the broad strategy and mandate, but you don't know whether
04:05 that strategy is actually going to work.
04:07 Of course, a good fund manager does add confidence, but I feel like if there are enough, you know,
04:13 existing funds in the category with a track record, I would prefer to look at those.
04:18 You know, in fact, even if there are unique strategies, it's better to wait for some time
04:23 to see if that team or investment strategy actually plays out before investing in those
04:28 funds.
04:29 Fair point.
04:30 Santosh, coming on this one, what are your thoughts?
04:35 And you know, the added layer that I'm adding to this conversation is that there are, in
04:42 the last 12 months, there's a slew of new funds that have come in, which are managed
04:47 by fund managers or houses, which have had a track record in different ways, right?
04:52 In Old Bridge, Kenneth Andrade has run an AIF very successfully and has a track record
04:57 of IDFC in the past as well.
05:00 Similarly, Helios and Samir Vora's track record out there, or Trust, which has got Utpal Sheth
05:05 and Mihir Vora's track record.
05:07 So in some sense, newer funds, but managed by people with immense pedigree.
05:13 And we know what Quant has done.
05:15 I'm not saying that therefore others will do that, but a new fund house comes in, disrupts
05:18 and does great returns as well.
05:21 So my larger question is, I take on board Saloni's point that flexi-cap funds are large-cap
05:25 buyers and therefore liquidity is not an issue, but the overall size, could that hamper outperformance
05:31 moving ahead relative to what could happen to some of these newer funds?
05:38 So great question, Neeraj, and there are two parts to this.
05:40 Let me just break it up.
05:42 One, all the new guys that have come in the last 12 months, I like all of them.
05:46 And I think you so rightly said, all of them come with great experience, the number of
05:51 years they've spent in the market and also the pedigree.
05:54 Whether it's Helios or whether it's Old Bridge or whether it's Trust, we have no problem
05:58 with the offering or even with the portfolio manager because they've got a clear proven
06:03 track record.
06:04 Now coming back to flexi-cap funds and the size.
06:06 Are we worried about the size of a flexi-cap fund?
06:09 The answer is no, and I would like to put some perspective to it.
06:13 The markets themselves broadly have actually grown quite a bit.
06:17 If you look at the mutual fund industry AUM at over 50 lakh crore has grown and therefore
06:22 you are bound to have some funds which have got track record and performance to be large
06:27 funds like this.
06:28 It cannot be that the AUMs are growing and funds will not become big.
06:33 Now you also add another layer of perspective that even the market capitalization of many
06:37 of our stocks have gone up significantly.
06:39 Now you take the largest flexi-cap fund, let's say 60-70 thousand crores and you take the
06:43 largest holding in that, let's say another 6000 to 10,000 crores.
06:48 Now that 6000 to 10,000 crores in a large cap stock which has got let's say 5 lakh,
06:53 10 lakh, 15 lakh crore market cap, really not a cause of worry.
06:57 Now the good thing is that these funds are also becoming large on two reasons.
07:02 One they're performing well, therefore the size is growing.
07:06 Also they're getting a lot of inflows because of good performance and good track record.
07:10 So as long as you have those things working for you, whereas where the market is growing,
07:15 the market capitalizations are growing, the fund is delivering and the portfolio manager
07:19 is able to meaningfully add value to incremental monies and manage the existing investors'
07:25 money well, I think there's nothing to worry and flexi-caps are here to stay and will do
07:30 even better.
07:31 Okay, fair point.
07:32 So both of you are on the same side of the argument.
07:35 Saloni, I'll just ask one question and this comes in because there are a few people who
07:41 are saying that if I have a limited amount to put in a flexi-cap fund and I have existing
07:47 SIPs into those large funds, but there are these new fund managers with a very attractive
07:55 track record in the past, should they be looked at?
08:00 And in some sense the small size might just help going ahead.
08:04 If the AUM for let's say NHDFC would double from here over the next five years versus
08:09 some of the newer funds, then the outperformance possibilities might also change.
08:14 Is that a valid argument or not quite?
08:17 I don't think that's valid.
08:19 I think the point that we've made, there is a lot of room in the flexi-cap fund, even
08:24 the current fund, given the current AUM to grow, there's a lot of room there.
08:28 Even if one were to continue the SIPs, I think there's a lot of room.
08:32 So just size is not the only determinant of whether a fund would do well or not.
08:38 I would give some of these new fund houses maybe a couple of years to see how their strategy
08:43 pans out before investing significant amounts in them.
08:46 Fair point.
08:47 So just for the benefit of our viewers and before we take that break, Santosh, if I were
08:51 to ask you, from the funds which have traditionally done well, and I think there was some graphics
08:57 which showed how PPFAS or some of the others have had a very nice track record for a number
09:03 of years now, but it's not the only one, whatever else out there, from amongst the
09:07 flexi-cap category, which are the ones that you like the most?
09:10 It not be an exhaustive list.
09:12 It's effectively a representation or two from the many that you might be liking.
09:17 And why?
09:18 So, yes, Parag Parikh on the terms of size or HDFC flexi-cap, all these have done well.
09:24 And, you know, any flexi-cap, I think that's got over a five to 10 year track record is
09:28 good both for keeping the funds and for continuing to hold in them.
09:33 Now, when one looks at the whole flexi-cap as a space, and we need to understand that
09:38 this was birthed out of the need that when SEBI scheme recategorization happened, you
09:44 had this one large multi-cap category where you had to really put them into a particular
09:48 basket and that's when flexi-cap as a category came, gave the fund manager the ability to
09:53 navigate between large caps and a certain bit of mid and small cap.
09:57 So therefore, flexi-cap as a category is now become a good old OG, which is the diversified
10:03 equity fund category.
10:05 So without being biased with any name, anybody with a five to 10 year track record is a straight
10:11 away go to.
10:12 Okay.
10:13 Saloni, would you be able to be, tell us what do you like as an example or an illustration
10:21 within the flexi-cap category?
10:24 I think currently, of course, PPFAS is one fund that has over a period of time demonstrated.
10:33 I think 361 focused equity is also good fund to look at in that category.
10:40 Okay.
10:41 Well, those are some examples and thanks both of you for breaking this notion in some sense.
10:45 I was trying to play the devil's advocate, but clearly both of you believe that there
10:48 is not a problem there.
10:49 So viewers, if you're listening into this conversation, whenever, whether on TV right
10:53 now or on digital later on, let not the size of the flexi-cap fund at least bother you.
10:58 I think Saloni made an interesting point that for a small cap fund, this argument could
11:01 still be valid because of liquidity, so on and so forth.
11:04 For a flexi-cap fund, I think there's still some room to maneuver.
11:07 So some of the well-performing funds might still be the go to funds to look at.
11:11 We need to take a break, of course.
11:13 We'll come back from the break, talk about the other topic, which is debt funds versus
11:21 FDs, if you will, at the current rates and time permitting, we'll try and take some queries
11:26 as well.
11:27 We as professionals understand the importance of making informed decisions and often are
11:45 advisors to our clients.
11:48 Voting is no different.
11:49 As citizens of this great nation, we have the power to shape its future.
11:55 And one of the most crucial ways we can do that is by casting our vote.
12:00 It's not just a right for every citizen.
12:03 It's a responsibility, a responsibility to ourselves, to our communities and to our country.
12:12 So I urge all of you to exercise your right to vote.
12:18 I always ensure that I fulfill this duty to our country.
12:23 Let's show the world the power of our democracy, the power of our collective voices.
12:29 Together we can make the difference.
12:32 Together we can build a better tomorrow.
12:34 Back with the Mutual Fund Show right here on NDTV Profit.
12:53 A couple of very interesting queries.
12:55 And Venkatesh, let's start off with the queries actually first and then we'll move on to the
12:58 second topic.
12:59 Venkatesh has a query.
13:01 He's aged 39 years.
13:04 His goal is to buy a house.
13:06 He's saying that I've been investing 50,000 rupees a month since the last one year in
13:11 mutual funds.
13:12 My goal is to buy a home after 20 years and the house currently costs 1.2 crores.
13:18 Will I be able to achieve my goal without a bank loan through these investments or do
13:22 I need to change my strategy?
13:24 The current SIPs are in quant small cap, ICICI Prudential Blue Chip, 10,000 apiece, HDFC
13:31 FlexiCap, HDFC Top 100 and Quant Mid Cap.
13:34 That is his bifurcation.
13:36 The timeline is long.
13:38 Santosh, can I ask you to advise Venkatesh?
13:43 I think this is a good thought, brilliant approach to begin with.
13:49 Now the straightforward answer is you don't need a home loan.
13:51 I think you're well sorted with this.
13:53 Now there are just one or two assumptions that I have to make for you Venkatesh to give
13:56 you this answer.
13:57 Number one, you also have to consider that the cost of home, which is 1.2 crores today,
14:03 20 years from now will not remain the same.
14:05 Of course, you have to take into account inflation and therefore with that assumption, I would
14:09 think that the cost of the house will be between three and a half to four crores in a 20 year
14:14 time frame.
14:15 Now let's look at your SIPs.
14:17 What are they going to achieve over the next 20 years?
14:19 Now I'm not going to disturb your choice of funds and I think the most important aspect
14:24 is the fact that you've chosen a good bunch of diversified equity funds and you have a
14:28 20 year track record.
14:30 Now just the corpus that you will accumulate will be about 1.2 crores.
14:36 Now if they were to grow at 10 or 12 or 15, the numbers will be between 3.8 crores or
14:41 5 crores or seven and a half.
14:43 Now in this perspective, in a 20 year period, your corpus would be even at a 12% over 5
14:50 crores.
14:51 So with that money, you will very comfortably be able to buy your home without a loan.
14:56 And as an added bonus, you'll have some money left over, which could be a portion of your
15:00 wealth or something else that you can fund yourself for.
15:04 But this is a nice way and I'm glad you asked this question.
15:07 It is possible you will actually do better for yourself than taking a loan right now
15:11 and struggling through the 20 years.
15:13 But at the end of 20 years, you'll have a brand new home and extra savings also left
15:17 for you.
15:18 Okay, so that's one advice.
15:22 And Venkatesh, I hope this answers your query.
15:24 I'll ask Saloni to give a response on the second query because time is short.
15:29 And the second query is from Rahul Das.
15:32 Goal is a retirement fund.
15:33 And Rahul Saloni says that, "I'm planning," I'm quoting him, "I'm planning to invest around
15:39 75,000 rupees a month for the next 10 years.
15:42 I'm ready to take moderate to high risk.
15:44 Please suggest four or five funds to diversify my investments."
15:50 Do you reckon you can advise Rahul Saloni?
15:52 Sure.
15:53 So, Rahul, prima facie, it's difficult to recommend the right asset allocation without
15:59 knowing your risk-taking ability and age.
16:02 But I assume that you're relatively close to investment because you mentioned a 10-year
16:08 horizon.
16:09 So, I think the way you could split the 75,000 is look at 30% and maybe two good flexi-cap
16:16 funds.
16:17 You could look at PPFAS or 361 focused or any other good flexi-cap fund in the category.
16:24 You could invest another 30% in a mid-cap fund like Kotak Emerging Equity, and maybe
16:31 a 10% in a small cap fund of your choice, maybe a Nippon or SBI or Axis.
16:38 So I think that is how I would look at investing for the next 10 years.
16:42 Okay.
16:43 Sound advice, I'm sure.
16:45 And Rahul, I hope this helps you.
16:47 I'm sure it will.
16:48 Thanks for that, Saloni.
16:49 Okay.
16:50 Now the other topic, which might be a little broader topic and not necessarily a query.
16:54 And Santosh, I'll start this conversation with you.
16:57 There are people in my office who are asking that FDs are giving a particular rate of return
17:04 currently.
17:05 Debt funds are giving a particular rate of return.
17:07 Why should anybody invest in fixed income instruments via the mutual fund route currently
17:12 when fixed deposits are giving the kind of returns that they are?
17:15 If they're willing to hold onto the fixed deposits for over five years as well, then
17:19 there's some tax benefit that comes in too.
17:22 So could you tell what would you do, Santosh?
17:26 Well, the debate is now across the board, not only in your office, but all over the
17:31 place, the investor community have this notion in their mind that when you have the FDs at
17:36 an attractive rate, and I'm sure all of us have been getting those teaser SMSs from some
17:40 of the banks that how if you take it for 13 months or 25 months, they give you some good
17:44 rates.
17:45 Now, straightforward, the answer is that they are on par right now.
17:50 When you are able to get a good issuer at a good rate, I think then the clear answer
17:56 is if that is the point of convenience for you, you should go for it.
18:00 I for long maintained that anything more than seven and a half percent gross yield for an
18:06 investor is great, because we know that right now that long term capital gain benefit being
18:12 stripped away from the debt funds.
18:14 Right now you're on par and therefore your choice will be largely dependent on the yield
18:20 and also the convenience at which you can make this investment.
18:22 Now, we also have to keep in mind for a lot of investors who are still not even to this
18:27 date comfortable with mutual funds or especially fixed income mutual funds because of the little
18:32 bit of varying degree of difference in returns that they see.
18:36 For them, FD becomes like a de facto choice.
18:40 So therefore, I would say choose your convenience at seven and a half, eight or eight and a
18:44 half percent or even nine percent.
18:46 If you can get a good FD from a bank that you're comfortable with, go for it.
18:51 Mutual funds do have their place, maybe for hybrid funds, maybe for savings funds, and
18:56 maybe even for the longer term aggressive equity investors.
18:59 But clearly, the answer is choose convenience and choose the yield that works for you.
19:05 And I think eight or nine percent yield is lucrative to make that decision.
19:10 OK, thanks for that, Santosh.
19:13 Saloni, how do you think about it?
19:14 And your answer could be completely different, which is fine, but would love to hear.
19:19 So I think FDs are definitely a great option, you know, especially if you know the exact
19:24 duration and don't need to break the FD.
19:27 Also for senior citizens who get a point five percent higher interest in most banks.
19:31 But I think one thing that people should be aware about FDs is that if you break the FD,
19:37 you could be charged a penalty.
19:39 And secondly, you also get a lower interest rate for the premature withdrawal.
19:42 So, for example, you have a two year FD, but you break it in six months, you will get the
19:47 six month interest rate and not the two year interest rate.
19:50 And most of the higher interest rates are usually at the longer term or, you know, two
19:55 years, three years, five years kind of horizon.
19:59 Liquid funds have a similar, have given a similar return and can be a good option for
20:04 shorter term needs.
20:05 So, you know, you need funds for within one year period or you're not sure exactly when
20:11 you may need the funds.
20:12 So this could be a good option because there is only a seven day lock in, so it can be
20:16 redeemed anytime.
20:17 And the return that you would get would be similar, whether you do it for one year or
20:21 for a shorter period, the return that you look at would be similar in that.
20:25 Of course, there is no guarantee of fixed return as there is an FD.
20:30 And the benefit is also you pay tax only on redemption, unlike in FDs where you have to
20:35 pay tax every year on the accrued interest.
20:37 So even if you have a five year FD, you're still paying tax every year.
20:42 I think another good option that people could look at is arbitrage funds, you know, especially
20:48 because of the tax arbitrage.
20:49 They've given a return of around 7.6% on average in the last one year.
20:55 So say if we were to assume a 7% return on an arbitrage fund after one year, that means
21:01 a 6.3% post tax.
21:03 Whereas if you were to look at any other debt mutual funds or FDs, that would be a return
21:08 of 4.9% post tax.
21:11 So I think that is also one option that people could look at.
21:15 Okay.
21:16 Well, and the tax arbitrage still exists, at least until this budget.
21:21 Let's see if there are changes thereof.
21:23 So that's to be kept in mind.
21:24 But pertinent point.
21:26 Great.
21:27 Well, you know, take a moment to thank both of you, Saloni as well as Santosh for joining
21:32 us and giving us your perspectives.
21:35 I must admit, both sets of the answers are completely different than what I had thought
21:41 it would be.
21:42 And therefore, it's great to have such a conversation on the show.
21:45 Thanks for your time and your advice.
21:48 Thanks, Neeraj.
21:49 Thank you so much, Neeraj.
21:50 All right.
21:51 That's, well, our guests with their views.
21:52 I hope this show was helpful to both our viewers who asked for the specific query, but on two
21:59 very pertinent topics, at least to my mind.
22:02 Thank you for tuning into this leg of the Mutual Fund Show.
22:04 And stay tuned to NDTV Profit for more news and updates.
22:17 Hello, everyone.
22:30 I urge each one of you to exercise your right to vote.
22:35 Your voice matters.
22:37 And all our votes shape our collective future.
22:42 Let us make democracy stronger by going out and exercising our franchise.
22:47 Jai Hind.
22:47 Jai Hind.
22:59 (upbeat music)
23:02 [BLANK_AUDIO]

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