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