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00:00Hello and welcome to NDTV Profit, you are watching the Mutual Fund Show.
00:11I am Muralidhar Swaminathan, your host and joining me on the show is Vishal Jain, CEO
00:17Zerodha Fund House.
00:18Vishal, welcome to the show.
00:19I am Muralidhar, good afternoon, thanks for having me on your show.
00:24Good afternoon Vishal, these days we have an interesting combination of offering coming
00:29from mutual fund houses, but you are offering the investors something very simple and easy
00:37to understand and invest in passive funds.
00:40Can you take us through why are you sticking only to passive funds?
00:43So Murali, let me step back and explain what we are trying to achieve as an EMC.
00:51Our vision is to increase penetration and participation of individual investors in the
00:56Indian capital market through the use of mutual fund products.
01:00Penetration at this point of time is still limited to about 4.5 crore investors in a
01:07population of about 140 crores, which is just about 3% of the Indian population.
01:13And to enable this vision of increasing participation, we want to equip investors with products that
01:17are easy to understand, transparent and affordable.
01:21And passive products, index-based products, exhibit these qualities in the most straightforward
01:26manner and most of all they are scalable, right?
01:30And therefore our product bouquet will consist of simple exposures to index funds and ETFs.
01:34I mean, if you look at our product bouquet, we started off in November with an index fund
01:40and a passive ELSS scheme based on the NIFTY large mid-cap 250 index, a 50-50 exposure
01:48across large caps and mid-caps.
01:50So on one side, investors got the stability of large caps and on the other side, they
01:55got the growth kicker that comes from mid-caps, right?
01:58And so those investors were looking at investing in the Indian, who could invest in this product
02:03in perpetuity without the need for any other product and that was the objective with which
02:07we launched that product.
02:09The third product which we launched and which in fact has become a hero product for us is
02:15India's first growth liquid ETF.
02:17Again, an innovative product born from our dogged yearning and belief to make investment
02:23products easier for investors, right?
02:26This liquid ETF, liquid case made trackability easier for investors and one of the big things
02:32is it brought the price down from 1000 rupees which are the existing liquid ETFs to 100
02:38rupees and therefore made it more accessible to retail investors in a short span of time.
02:43That product has become 1400 crores across 75,000 investors.
02:49We then went on to launch the Zerodha Gold ETF and it's one of the cheapest gold ETFs
02:54in the market in terms of DER, our current offering which is the Zerodha Nifty Large
03:01Mid-Cap 100 ETF and the Zerodha Nifty Mid-Cap 150 ETF.
03:05Again, they're targeted equity exposures to different market segments and can be used
03:10by investors as basic building blocks for investors.
03:13With this bouquet of products, we would have offerings across equity, debt and commodity
03:19and therefore for those investors who are a bit more savvy, it helps them build individual
03:25asset allocation portfolios based on their individual needs.
03:29For others, we will look at launching a few ready-made solutions, say in the fund-to-fund
03:34format and therefore when an investor looks at say a Zerodha fund house, he would have
03:39the ability to build his own portfolio and also be able to pick certain ready-made solutions
03:46from the products that we'll have.
03:48Right.
03:49I will ask you a very simple basic question.
03:53It looked like an obvious one.
03:55There are so many passive funds, there are so many fund houses who offer a variety of
04:00both active and passive and ETF as well.
04:03But why should one come to Zerodha?
04:07I think it's different fund houses have different ways of selling it.
04:12I think what we are trying to do is we're trying to focus more on the retail market.
04:18We're trying to build products which are very retail-centric and it depends on each investor
04:25in that sense.
04:26If you look at, as I said, if you look at the kind of products that we're building,
04:29I gave you a simple example of a liquid case which is a liquid ETF, again a product which
04:34is two decades old, in a short span because of the fact that we've built products which
04:39are very retail-centric, we've got huge traction coming in from there.
04:45So I guess it's a fact that we're building products and the name, you know, brings trust
04:50with it.
04:51Right.
04:52Okay.
04:53So explain to our viewers the difference between a passive fund and an ETF, because both are
04:59very simple to use, no brainers, there is no fund manager behind this.
05:04The market takes care of your investments.
05:08How does one differentiate between a passive and an ETF fund?
05:13So both ETFs are passive and index funds are passive as well.
05:18It's just that they're two different structures.
05:20So if you look at the mutual fund market or if you look at mutual funds over the last
05:2350, 60 years, there are only three structures in the market, right?
05:28When mutual funds started off, they started off with something called a close-ended structure,
05:31which in a sense is not very popular in today's day and age.
05:36Then you had open-ended schemes, which now are the mainstay of most mutual fund products
05:42in the market globally.
05:44The third structure which has come about is an exchange-traded fund, again, a passive
05:48product, but products which you can price on a real-time basis.
05:51So I would say that whether it's an index fund or it's an ETF, the benefits of passive
05:57investing is what somebody should look at, which is the simplicity, the transparency
06:02and the fact that it is very cost-effective.
06:06If you have a broking and trading account, it makes sense for you to invest in ETFs which
06:10are listed on the market.
06:12If you don't have a broking and trading account, it will be good for you to invest in passive
06:18products through the index fund route.
06:21What is the kind of cost advantage, let's say, an ETF would have over passive funds?
06:30If you look at the broad-based products, I don't think the difference is too much.
06:34Typically, Nifty-based, Nifty-50-based ETFs are at about 0.05% or so.
06:40Nifty-50-based index funds may be at about 0.07% or 0.08%, so I don't think the difference
06:47is too high.
06:48I think the important fact is getting exposure to a passive product, using it as a core of
06:54your portfolio to take exposure to either the India growth story or to build various
07:01kinds of asset allocation models depending on your risk-return profile and needs.
07:07Right.
07:08So as far as passive funds are concerned, one has to go to the fund house to buy or
07:12sell, but ETFs look like they have just started picking up.
07:18There are liquidity issues as far as ETF is concerned, and there are also issues about
07:22the tracking error.
07:24How would you look at this?
07:26Would you advise an investor to go for a passive fund or if it is the same basket, let's assume
07:31that it's the same basket of stocks that are there in both, which one would you advise
07:35an investor?
07:36I mean, again, as I said, I don't have a preference towards an index fund or an ETF.
07:43I would say that if you are a person who has a brokering account and a trading account,
07:49then buy the ETF through the broker that you have.
07:54If you don't have a brokering and trading account, buy it through the fund house directly.
08:01Today, there is a certain amount of transparency that is there in ETFs.
08:06Earlier, there was an issue in terms of people didn't know what the fair value of the ETF
08:11was.
08:13Now, with this day and age, I mean, it's become mandatory for fund houses to disseminate the
08:18real-time NAV of the fund house of that particular ETF.
08:23So investors could go on to the specific AMC's website and look at the indicative NAV or
08:29could also look at those NAVs on the exchange's website and based on that, then buy or sell
08:37depending on what the NAV is.
08:39If you could give us the example of one of your ETFs, I think you have one ETF which
08:45was launched recently.
08:48What's the kind of tracking error?
08:49What is tracking error?
08:50What is the kind of tracking error?
08:52Should investors seriously worry about it?
08:56So tracking error is basically calculated on the end of the day and it doesn't impact
09:03you for those investors who are buying and selling the ETF on the stock market.
09:08So the tracking error is basically in terms of the definition is the difference between
09:16the returns of your fund versus the difference in returns of the particular index and you
09:24take the standard deviation over a one-year period and that kind of becomes a tracking
09:29error of the scheme.
09:31If you look at passive products in this day and age, the tracking error of the schemes
09:35is not very high but investors, when they're going into ETFs, they should obviously look
09:39at what the fair value of the scheme is and based on the fair value of the scheme, buy
09:43in and around that.
09:44Now there are pros and cons to any product in the sense that ETF gives you an ability
09:49to buy and sell intraday.
09:50So let's take a simple example that the market is maybe down one and a half, two percent
09:54and by the end of the day, it goes up one and a half, two percent.
09:57So you have the ability to enter the market at this point of time and that's what an ETF
10:01gives you an ability to do.
10:03Exactly, I think on the 4th of June when the markets crashed, ETF would have given a great
10:09opportunity for investors to step in and buy instead of waiting for the days NAV in an
10:14active fund or a passive fund for that matter.
10:18I'm sure that would have given a lot of returns.
10:23That's right.
10:24I mean the ability to be able to get in and get out real time, this is something that
10:28ETF gives you an ability to do.
10:31But what is the future of ETFs?
10:34This question, the reason why I'm asking is that ETFs right now are very, very simple.
10:39They are attached to a basket of index.
10:41It could be any index for that matter.
10:43But innovative ETFs are not coming.
10:46So today, for example, if there is a group whose stocks are really running or even if
10:52it is a one stock ETF, when do we see those kind of innovative products coming into the
10:57market?
10:59I mean at this point of time, regulations don't permit us to have single stock ETFs.
11:06So regulations permit us to generally launch products based on a broad based index.
11:13You can do sector indices and thematic indices and factor based indices as well.
11:19As per the regulation, the regulation states that minimum, the top three securities should
11:26not be more than 65 percent of the index and any individual stock should not be more
11:30than 35 percent.
11:31So based on those regulations, you can then do sector based, thematic, factor based ETFs
11:39as well.
11:40And there are quite a few which are already there in the market at this point of time
11:44for investors to choose from.
11:45Right.
11:46Where do you see the ETF market growing?
11:48The reason why I'm focusing on ETFs is that it's cost effective.
11:52It's very simple.
11:53You can buy it anytime like any other share.
11:55Where do you see the ETF market growing from here as an industry as a whole?
12:01I mean, the largest scheme in India today is an ETF, right?
12:05I think that itself speaks volumes about where the industry will go.
12:08I mean, look at the adoption as well.
12:11I mean, I've been in the ETF market now for about two decades or so.
12:14But if you look at what has happened in the last five years or so, there's been a five
12:18times increase in terms of AUM and even in terms of number of investors coming into the
12:23market.
12:24I think where ETFs help is the fact that it allows very simple exposures, which are there,
12:29I think, in a country like India, where there is still a large population which is still
12:34figuring out how to invest and what to do.
12:37I think passive products like ETFs and index funds will become, you know, the first port
12:42of call for investors to kind of start their investment journeys from.
12:47And I'm quite bullish in that sense about that.
12:50Very interesting, what to say, offering in the mutual fund industry, because the mutual
12:57fund industry is overcrowded with a large number of schemes, you know, choosing becomes
13:02very difficult.
13:03But I think that's where ETFs and passive funds come into play.
13:06It's very easy.
13:07You can simply buy ETFs or passive index funds, keep them, forget it for the next 10 years
13:13or 15 years.
13:14You will just simply grow with the market.
13:15Thanks a lot, Vishal, for joining us.
13:18That was very insightful.
13:19Thanks, viewers.
13:20Thanks for having me.
13:21Thanks a lot.
13:22We'll slip into a short break.
13:25On the other side, we'll be joined by Optima Money Manager, Founder and CEO, Pankaj Matpal,
13:31and take some questions from the viewers.
13:42Welcome back.
13:43You are watching the Mutual Fund Show.
13:45And I'm being joined by Pankaj Matpal, Founder and CEO, Optima Money Managers, Pankaj, welcome
13:50to the show.
13:51Nice to meet you and interview after a very long time.
13:55Thank you very much, Mr. Murli, sir.
13:58It's my pleasure being on the show.
14:01Wonderful.
14:02So, Pankaj, we were talking about passive strategies, you know, we are looking at passive
14:06index funds and exchange traded funds.
14:09They are gaining popularity by the day people are realizing the value and importance of
14:14this.
14:15So you are an expert.
14:16Tell us, tell our viewers, what is the significance of investing through passive strategies or
14:21passive funds?
14:22See, passive funds are simple to understand, that is the most important thing.
14:28For investors, there are multiple choices.
14:31They have choice to invest in broad based index funds or broad based ETF like large
14:38cap, mid cap, small cap, multi cap like this, or they have choice to invest in sectoral
14:44or thematic indices.
14:46At the same time, there are some factor based investing or factor based ETFs are available.
14:53So there are multiple choices.
14:55So investors based on their risk appetite, their financial goals, their objective of
15:00investment, they can invest in these passive funds.
15:05Right.
15:06So let me ask you to explain a little more about factor based investing, because that's
15:11something new.
15:12That's a new concept which is catching up.
15:14And how does it work?
15:16What kind of benefits are there?
15:17Is it something that will give you superior returns or will it, you know, cut down my
15:21risk?
15:22Yes, this is very important because when you invest in index funds or in passive funds,
15:29you expect the similar kind of returns what the particular index will deliver.
15:34But these factor based investing or factor based indices, basically these indices try
15:42or they aim to outperform the parent index.
15:45For example, if I talk about nifty alpha low volatility index, it means that the stocks
15:55in the portfolio will be exactly same as in the nifty 100 index.
16:00But because these are selected stocks out of that.
16:05So there can be a lower risk, which the aim is to control the risk at the same time to
16:12outperform the index.
16:14So there can be selected stocks from the parent index, or there may be all the stocks from
16:20the parent index, but their weightage may differ from the parent index.
16:24For example, if we take example of nifty 50 or nifty 50 equal weight index fund, it
16:31means in nifty 50 equal weight index fund, all the stocks will have the same weightage
16:37around 2 to 3%, whereas in nifty 50, one stock may have very high weight at the same time
16:45when the stock may have very low weightage.
16:47So that is why to control the risk and to outperform the parent index, this factor investing
16:54has come in system and there can be multiple factors like value, quality, weight like this
17:03and investors who understand the market, this can be a good choice for them.
17:09Right.
17:10Very interesting.
17:11You know, investors who understand the market should explore those options.
17:16But let's do one thing.
17:17Let's go across and take queries from viewers, Pankaj, as you know, a lot of viewers keep
17:22asking questions and we have millions of viewers in the mutual fund industry.
17:26We have a query from Hemraj.
17:29He wants to know, I want to invest 3 to 4 lakhs in mutual funds for 8 to 10 years.
17:35What funds would you recommend to me?
17:39For the investment horizon of 8 to 10 years, I'll say that Hemraj can choose to invest
17:46in multi-cap funds as well as diversified funds like multi-cap, large and mid-cap and
17:52flexi-cap.
17:53So, Kotak multi-cap fund can be a good choice.
17:57At the same time, ICC Prudential large and mid-cap fund and Motilal Oswal large and mid-cap
18:02fund and in flexi-cap category, Nippon India flexi-cap fund can be a good choice.
18:09Right.
18:10So that is a very simple and straight question.
18:12But the next one is very, very interesting.
18:15The next investor's name is Mohit.
18:18He is 25 years and his goal is retirement.
18:21That's okay.
18:22That's very normal.
18:23But the interesting point is he wants to retire at the age of 35.
18:29Make a note.
18:30He wants to retire at 35.
18:31He wants to invest 5 lakhs in mutual funds.
18:34And he has also invested some 30 lakhs in equity, direct equity.
18:37He is asking for recommendation.
18:38Remember, he wants to retire at 35.
18:41Sir, he wants to retire at 35 but what is his age now?
18:45That is also important to know.
18:48And I don't know whether it's really correct to decide to retire at 35 or I'll say one
18:56should retire when you have sufficient money or maybe that he wants to say that he wants
19:02to retire from the active job and at the same time he will do something on his own.
19:08But whatever it is, the most important thing is that 30 lakh rupees what he has now in
19:14the direct equity.
19:16See if you can outperform the mutual funds, then you can invest in direct equity.
19:21But most of the time I have seen that investors have a basket of 40-50 stocks in the portfolio
19:28and the overall returns are not even matching the returns of diversified mutual funds.
19:34So only investors who have the ability to outperform the mutual funds, they can invest
19:39in direct stocks and then there should be selected stocks in the portfolio.
19:44Then only you can outperform the index.
19:46But otherwise, for most of retail investors, it is better to invest in mutual funds.
19:52And also for like five years investment horizon at this point of time when we know the market
19:57means there has been a good rally in the market and values are little expensive for most of
20:04the stocks, my suggestion will be that one should go for large cap mutual funds or hybrid
20:12funds like dynamic asset allocation or multi-asset allocation funds.
20:17Right.
20:18You know, that's a very, again, what to say, plan that most people would have that I will
20:27make an X amount of money and I will retire at 35, 40 or 45.
20:32But then viewers and investors should remember that you cannot retire from investing.
20:36You will continue to invest.
20:38Only if you continue to invest, you will continue to build wealth.
20:41The other important point, Pankaj, before I take the next question is, see in the current
20:46market scenario, let me view myself as an investor who is coming in today and I have
20:52not invested in mutual funds at all, you know, in the past.
20:56So I get attracted to the market.
20:57I am looking at all the indices.
20:59They are all every day they cross new highs, you know, whether it is nifty or mid cap or
21:04small cap.
21:06Now, what should be the strategy, you know, for two sets of people?
21:10One is somebody who is investing lump sum.
21:12The other who wants to invest month after month.
21:16What should be the strategy from here to ensure that you don't keep buying at a higher average?
21:23Because then what happens if I am buying at with the nifty index at ranging between
21:2823 to 23,500, I end up buying at a higher price and my average goes up.
21:35What would be your advice?
21:36Wait, wait for some time and then start or simply keep starting, start your SIP?
21:42Sir, because we all know that it's difficult to time the market, so it will not help waiting.
21:49But yes, one can invest in a staggered manner.
21:53One option is SIP, as you mentioned.
21:55So if somebody wants to manage the cash flow means every month you are getting some income
22:00and then you want to invest out of that SIP will be helpful.
22:04But if you have already money available with you, in that case, there are two things.
22:09One, you can opt the STP, systematic transfer plan, where you invest the lump sum amount
22:15in a low risk mutual fund scheme and generally a liquid fund or short duration fund.
22:23And from there you transfer it systematically to the equity fund.
22:28So STP can be helpful when you have the money available with you in lump sum.
22:33Second thing, you can choose to invest in funds like multi asset allocation or dynamic
22:39asset allocation funds.
22:41Like in dynamic asset allocation fund, if you invest your money, fund managers, they
22:46decide that how much should be in equity, how much should be in debt.
22:50And from time to time, rebalancing keep happening.
22:53So at this moment, when you feel that markets are almost at peak and you want to invest
22:59in lump sum, you can invest in such funds where the asset allocation is managed by the
23:05fund manager.
23:06So that can also be a good choice if you are a long term investor.
23:09So SIPs, STP and also investing in dynamic asset allocation and multi asset allocation
23:17funds, it can be helpful.
23:20You know, just to add to the point which Pankaj was making, two points here.
23:24If you have lump sum STP, that is systematic transfer plan is going to be very helpful
23:30because if you're busy or doing other things, you may forget to allocate every month.
23:36So it's better to go for a six month STP where your funds get transferred.
23:40That's one option.
23:41Or simply if you have the ability and you have surplus, when markets crash, just go
23:47out and buy the best mutual funds you like.
23:49That's the best option to do and keep accumulating and averaging.
23:52The next question Pankaj is from, this is very important and interesting.
23:56I think this is something millions of investors want to know in this country, how to build
24:02reserve for children's education.
24:05So Mahinda, who's 44 years, wants to know my kid's education.
24:10I want to invest 50,000 monthly in mutual funds, but he's expecting 15 to 24% return.
24:17As an aggressive investor, what funds can you recommend?
24:20I also have approximately 25 lakhs in an equity portfolio.
24:24So I think he knows the market.
24:25He wants to take risk.
24:27Let's see, when investors ask this kind of question, the simple answer can be that you
24:33invest in thematic funds, in the themes which may outperform the broader market.
24:40For example, if you say PSU theme or manufacturing theme or infra theme, because if you expect
24:48that these themes will do better than the broader markets, can be a choice.
24:54Second thing in long term, we also know that small cap has ability to outperform the large
24:59cap funds.
25:01But still, I will say that one should have a diversified portfolio.
25:06See, simply one can say that he's an aggressive investor, but I have my experience whenever
25:13there is a correction, the market, most of investors, then they feel pain of that.
25:18So my advice to Mahindra that you should maintain a diversified portfolio and your returns of
25:2415% expectation long term may be a fair expectation from mutual funds.
25:30If you have investor horizon of, say, 12, 15 years, 20 years.
25:34So here again, I'll say that diversified funds should be a portfolio, multi cap funds, large
25:40and mid cap funds, or your mid cap fund can also be added to your portfolio.
25:46So in systematically you invest in these funds.
25:49But as I mentioned about the themes right now, like manufacturing theme is one theme
25:54and infra or renewable energy.
25:57So some part of your portfolio, you can allocate 15 to 20% maximum in these themes for next
26:03five years, expecting better returns than broader market.
26:07So Pankaj, there is a manufacturing, perhaps the first fund to be launched, HGFC mutual
26:13fund has launched a manufacturing fund, HGFC manufacturing fund.
26:17I guess that's the only manufacturing fund available?
26:20No, sir.
26:21In defense, yes, HGFC is the only one who has defense fund.
26:25But in manufacturing, there are many funds, like ICICI potential manufacturing fund, there
26:30is a quant manufacturing fund, there is a Mahindra, Menulife has also launched this
26:37multi manufacturing fund, HDFC has, so there are multiple funds in this category.
26:42Right, there are multiple funds in the manufacturing category.
26:46And that's going to be the theme now, go with the theme, of course, it comes with risk.
26:50But look for diversified portfolios, which can cushion your risk when the markets fall
26:55and you don't get disappointed.
26:56Stay invested, continue to invest, not investing is a bigger risk than actually investing,
27:01invest continuously.
27:02And Pankaj, thank you so much.
27:04Thanks viewers for joining us.