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00:00Hi, thanks so much for joining in.
00:08You are watching the Mutual Fund Show on NDTV Profit and my name is Alex Mathew.
00:12Like the name suggests, the show gets you actionable insight on everything mutual fund
00:15related and today, the first part of this conversation is going to give you insight
00:20on how fund managers view the current market dynamics and also will give you insight on
00:25how a very popular scheme is currently looking at the market.
00:29Joining me at the start is Raj Mehta, Fund Manager at PPFAS.
00:33Raj, thanks so much for taking the time and pleasure having you on the program.
00:37A lot of people are looking toward you for guidance and also to try to understand what
00:44your thought process is when you're looking at the kind of swings that we're seeing in
00:48the market and the drawdowns that we're seeing.
00:50So if you were to look at the market and how it's behaved over the last few weeks, what
00:56stands out to you?
00:58Yeah, firstly, thank you for having me on the show.
01:01Our view on the markets for the last few months has been that it is in the relatively overvalued
01:08zone and hence it's really difficult to find attractive opportunities to buy into this
01:15market and cash has built up over a period of time.
01:20So if you look at the cash levels as on the last month end, it's around 18 to 19% of the
01:26portfolio for the Flexicap and similar levels for our tax-saver fund as well.
01:33So it's really hard to find attractive opportunities at this point in time and hence this cash
01:40build-up.
01:41That's exactly part of what I want to talk to you about because we've been talking about
01:45this cash build-up for a few mutual fund schemes and yours has stood out because so many people
01:51track your scheme as well, is that you've done this in the past and you've done it on
01:57strategic occasions in the past.
02:00In retrospect, it has always panned out that it has worked in your benefit.
02:06What according to you are the key reasons why you've done it in the past when you've
02:10had similar cash positions?
02:12Sure.
02:14So our investment style has always been that we don't force ourselves to remain invested
02:20at all points in time.
02:21Whenever we feel that the valuations are stretched and we are not able to find attractive opportunities,
02:29we are happy to remain in cash as well.
02:31We look at cash as a balancing figure in the portfolio.
02:35So if we find any attractive opportunities today, tomorrow, happy to deploy it.
02:39If we are not able to find, happy to keep it in cash and wait for the opportunities
02:44to come by.
02:45So you mentioned a couple of occasions where we have had cash build-up.
02:51So just to mention a couple of them, in late 2017 or early 2018, when the mid-cap rally
02:57was at its peak, we had about 30% cash in the portfolio.
03:01It was not to do anything to do with the nifty levels, but it was to do with a lack of opportunities
03:09in the market to deploy this cash.
03:11And hence, we had built up this cash.
03:13And once that mid- and small-cap rally peaked out, we were able to find opportunities in
03:20the mid- and small-cap space and deploy that money immediately.
03:24Similar build-up was seen in the COVID times when cash levels were at 12-13% in March of
03:292020.
03:30And just in 15-20 days time, we are able to deploy almost all of it and the cash levels
03:35came down to 2-3% of the portfolio.
03:39So that helps in downside protection, that helps in minimizing drawdowns, and that helps
03:45in risk-adjusted returns over a longer period of time.
03:49Raj, but I'm just curious what you have to say about, and of course, nobody's asking
03:54you to justify moves in the very short term.
03:56I'm just curious what your response has been to the 6.7, 6.8, more than 6.5% fall in the
04:04benchmark, more than 7% fall in the broader markets.
04:08I'm talking about the small cap.
04:10Has that provided you with any opportunities to deploy some of the cash that you accumulated?
04:15And that, as you pointed out, stood at what, 18-19% at the end of September?
04:20Not yet.
04:21So not yet able to find the valuations to be in our zone as of now.
04:27Probably a few more rounds of correction, be it time correction or price correction,
04:33and maybe we'll be able to find some opportunities.
04:35So not at the moment, but maybe in the future.
04:39I'm just delving a little deeper into this cash strategy, because I think a lot of debate
04:46has happened already.
04:47And it's great to talk to you in person about it.
04:51Because the criticism of this strategy has been that while valuations have been uncomfortable
04:58for some time, and therefore, from your perspective, it's not appropriate to deploy the cash,
05:05they've not changed.
05:06And in fact, if anything, they've gotten even more stretched.
05:09And so as a result, you've not been able to participate in a broad-based bull run.
05:14Because I looked at the cash position last year also, it was pretty elevated, Raj.
05:19I mean, it was in double digit last year as well.
05:22So in that time frame, you've seen a run-up in equities.
05:25And so to that extent, you've missed out on the opportunity that the Indian equity markets
05:30have provided.
05:32What do you say about that?
05:34So that's correct.
05:35So we have always communicated to our investors that in raging bull markets, we'll probably
05:42underperform the markets, and maybe in the short term, we'll underperform.
05:47But over a longer period of time, I think that once we see a drawdown, maybe we'll be
05:53able to beat the markets by a decent number.
05:59So if you see one week back, maybe we underperformed the benchmark.
06:05But in a week's time, we have been beating the benchmark now.
06:09So it's just a matter of time of short-term underperformance.
06:14We are okay with it, as long as we outperform over a longer period of time on a risk-adjusted
06:20basis.
06:21That's a fair point.
06:22And I guess more important than anything else, and really the conclusion of all of these
06:26conversations, Raj, is as long as your investors are aware of the strategy that you're employing,
06:33they are going to be okay with it, because your performance speaks for itself, really.
06:37And I think we can put the matter to bed with that.
06:41But I'm curious about what you've done in terms of the sector rotation.
06:45And I've looked at the portfolio construct as of the end of September, and I've compared
06:50it with a year back.
06:52And I see in terms of sector, you have a significant change in banking, in power, and
07:00a certain amount of a change in gas transmission, agri.
07:03IT has decreased very substantially.
07:06Can you take me through the sector rotation that you've undertaken in the fund?
07:10Sure.
07:11So we look at companies on a bottom-up basis, irrespective of the sector that it is a part of.
07:18So most of these changes have been on a bottom-up basis.
07:23Private sector banking, of course, has underperformed over a three to four-year period now and remains
07:29to be in the reasonable valuation zone in a market where it's hard to find opportunities.
07:34So that's the sector where we are a bit on, and hence the weightage has gone up to around
07:3820% in private sector banks altogether.
07:41Power is a space where we like, we feel that India has remained under-invested, especially
07:48on the thermal side.
07:51Thermal hasn't picked up to the expectations that everybody had, and hence, at least in
07:55the next three to five years, we don't see thermal going anywhere.
08:00So we have a couple of PSU names in the power sector.
08:04IT, so we haven't sold any IT names, it's just that we haven't added because the valuations
08:11have creeped up in the past year.
08:13So with the increase in the AUM, we haven't added incrementally to the IT names, and hence
08:18the weightage has come down.
08:20Okay, that's a fair point.
08:22I also looked at a substantial fall in the overseas equity.
08:25Now, this is also a conversation that has been often had, Raj, but just to drive home
08:30the point, it stands, and correct me if I'm wrong, it stands at only about 12 odd percent
08:35right now, down from what, 16%, even a year back.
08:39And this is at a time when the companies that you hold have also done quite well.
08:44So the underlying has actually gone up.
08:47Can you explain why it, and one of the big draws, Raj, for those who remember the management
08:53of the fund for, from the years prior, before all the restrictions came through, is 27-28,
08:59nearly 30% allocation to international.
09:01So this is a far cry from that.
09:04Sure.
09:05So we would have liked to have added to those positions.
09:10But the problem has been that the whole mutual fund industry has been hit with an industry
09:15wide limit, which is $7 billion.
09:18So we cannot remit any additional dollars.
09:21And that limit has been exhausted for two and a half years now.
09:26SEBI and RBI are working on it, but they still haven't raised that limit.
09:31So because of which, what has happened is that all the inflows that have come in the
09:36last two and a half years have been incrementally only deployed in Indian stocks.
09:40So because of which the foreign percentage has come down from 30% to about 12-13%.
09:47So we haven't sold any of it.
09:49We would have liked to have added to those names, but we have to play within the rules
09:53that the regulator set for us.
09:55I've also noticed the addition, Raj, of certificates of deposit to the extent of what, three and
10:01a half or 3.25%.
10:03What's the thinking here, short term debt?
10:07So as you rightly mentioned that we have had cash for the past year or so.
10:13So given that most of the cash is deployed in either overnight money or arbitrage or
10:20short term debt paper.
10:22So depending on the spreads that are available, either on the arbitrage side or in one year
10:27short term debt, depending on the spreads that are there, we try to move the cash between
10:34these segments.
10:35So it's an alternative to cash, given that overnight money was at 6.5, 6.75 levels and
10:42short term debt was 7, 7.5 levels.
10:45We thought that it was better if we put it in short term debt and it's equally liquid,
10:50so not that much of a problem.
10:53So two possibilities that could potentially change your mind, I would think, on deploying
11:00funds.
11:01Earnings far outshoot what was expected.
11:04And so therefore, valuations relatively look cheap or valuations correct.
11:09The latter might be more likely than the former.
11:12But what factors need to be, what factors would you need to see play out for you to
11:18start deploying in a strategic manner?
11:22Most likely that the second scenario will play out, whether it's a time correction or
11:27a price correction, that is a question that needs to be asked.
11:32We have seen some numbers coming in for the second quarter, which were a little soft.
11:36The demand has been soft on the rural side, on some of the MFI space.
11:42We have seen two-wheeler numbers coming out, consumption numbers have been a little weak.
11:48So yes, maybe the earnings slow down and because of which there's a PED rating that happens
11:54or maybe the earnings remain at these levels and the PED rating, which was happening, that
12:02cycle stops and we may have a longest period where the valuations don't go up and they
12:09stay over there.
12:10So a time correction is also possible.
12:13Raj, thank you so much for taking the time.
12:16Pleasure having you on the show and season's greetings from all of us here at NDTV Profit
12:20to you, your family and the team.
12:23Thank you so much.
12:24All right.
12:25Let's talk about this a little bit more in detail and incidentally, we're joined now
12:30by Kirtan Shah, Founder and Chief Executive Officer at Credence Wealth.
12:35Thanks so much, Kirtan, as always for taking the time and season's greetings to you as well.
12:39Welcome back.
12:40As I understand it, you're coming back from foreign shores and the first conversation
12:44that you're having with me in a while.
12:47So I do want to talk about the cash positions and we have spoken about it at length in the
12:52recent past, but I'm curious what you have to say about that.
12:55And also there is some data that we pulled up about the relative outperformance slash
13:00underperformance of small cap actively managed funds since the 27th of September, a very
13:06short term period.
13:07But there has been an outperformance relative or relatively less loss of value compared
13:16with the benchmark for all but three in the sector.
13:19Does that tell you that these fund managers have read the signs much in advance and have
13:24already allocated based on that?
13:26Alex, thank you so much for having me on the show.
13:29It's always a pleasure and greetings to everybody who's watching us and the entire team.
13:33Alex, I have a very different view.
13:35I actually belong to the camp who believes that as a fund, you should try and avoid taking
13:41cash calls.
13:42The data that you just spoke of is very short term for us to really be able to draw any
13:49conclusions out of it.
13:50Because if I have to just give you a counter data to that, I see a lot of these funds have
13:54been standing on cash for over three, four quarters.
13:57And just in the last one year, just at the nifty levels, we are up close to 30%.
14:03So there has been a significant underperformance also, if at all you've been standing cash
14:08for such a long time and the markets have gone up so much.
14:12And whenever you talk about taking cash calls, it is like timing the market, right?
14:17You are saying that markets are expensive, I don't want to deploy new cash at this point
14:21in time.
14:22And the cash is not only the cash that you have right now, but the incremental cash that
14:26you keep taking in as lump sum and new SIPs.
14:30Now, as a fund, you are taking a call that probably markets are expensive, I will not
14:34deploy at this point in time, which is a timing call that you are taking and you've got to
14:40be right on two fronts.
14:42First is, when you don't deploy, the markets don't go up because if the markets go up,
14:48then you're losing out on the opportunity.
14:49And when the market starts correcting, at what point in market do you really want to
14:54enter?
14:55Is a 5%, 6% fall a good fall to enter?
14:59If yes, do you deploy everything?
15:02So there are a lot of moving elements.
15:03I'm sure fund managers are far more better at doing this versus probably a retail investor.
15:11But I think as a fund, if your objective is very clear that you will stand cash, then
15:17it's okay, you can take cash calls because you mentioned that in your objective.
15:21But as a fund, if that's not your objective, I think you should avoid taking cash calls.
15:27That last point is very important as well.
15:29I hope that you heard and found useful the conversation that I just had with Raj from
15:35PPFAS.
15:36And he said that they have often over the course of the last several years done this
15:41and they have communicated it to their unit holders as well.
15:44But it's not just them, right, Keetan, there are so many funds that have currently taken
15:48that cash call.
15:50You have certain data on that.
15:53I think yes.
15:54Talking about PPFAS first, very honestly, there are two funds that I've been tracking
15:58for a long, long time.
16:00And these fund houses often take cash calls and they make it a point to communicate, which
16:05is PPFAS and ICICI.
16:07I saw them doing very similar in 2020 and I saw a lot of funds do this in 2008 as well.
16:15To give you some data I was looking at, I think keeping a cash of 3 to 5% is pretty
16:22normal is because when you have 3 to 5%, you want that kind of cash to make sure that if
16:26at all there are some redemptions coming up, you have enough liquidity to make good for
16:31the payments.
16:32But if you have beyond 5% cash in your portfolio, this is surely a technical bet that you're
16:38trying to take where you think that the money that you have is not investable at this point
16:43in time.
16:44I was looking at some data at the end of September and there were close to 18 schemes, 18 equity
16:49schemes, which had more than 10% of cash at the end of September.
16:53And there were 106 schemes which were holding more than 5% cash.
16:58And this was across multiple AMCs.
17:01But I think PPFAS and ICICI to AMCs that in my last 14, 15 years of doing this and tracking,
17:08I've often seen them take cash calls.
17:11That's a fair point.
17:13The other aspect is, and I've wondered this, Kirtan, of course, maybe I will ask a few
17:18more fund managers what they think about this is that if you've gotten used to, and I'm
17:23going to draw an analogy, maybe it'll make sense to you and you can comment on it.
17:27If you've gotten used to taking the bus every day, and you know that the bus is going to
17:31be late, you will take the opportunity on a few occasions to, you know, get to the bus
17:37stop a little late.
17:38But if the bus has gotten much faster, and is on time, and perhaps even ahead of the
17:44time, then you're going to miss the bus.
17:46Is that the case with the Indian equity market?
17:49I think Alex, look, like I did mention to the last comment also that we were discussing,
17:55my problem here is that there are two, three moving elements, Alex, first, we are missing
18:01out on the entire equity piece in terms of liquidity that is getting pushed in by the
18:07retail investors.
18:08Both of us know that probably 95,000 crore worth of FIIs have sold money and equally
18:15DIIs have bought, right?
18:17So a lot of cash that was sitting at the end of September has got deployed in October.
18:21Now, the problem is at the levels at which new SIPs are coming in, and the majority of
18:26the retail investors who's buying every small dip that you're seeing in the market, this
18:31cash is only going to keep increasing at the mutual fund level is my understanding because
18:37of new lump sum investment coming in, and new SIPs or continuation of the SIPs that
18:43is happening.
18:44Now, if this situation is only going to be even bigger of a problem going forward, because
18:50more and more retail investors will come in, I am slightly skeptical of how quite often
18:57will you really be able to take this cash flow, because I've been hearing that the markets
19:01are expensive.
19:02And let me tell you, I do believe that mid-small markets are, let's say, expensive.
19:06But how often will you not do anything with the cash that is coming in?
19:11Because the best way to do this is stop taking new money in the fund, which not a lot of
19:15other funds are doing.
19:16So what you're doing is you're not stopping to take new cash in the fund, but when the
19:21money comes in, you don't know where to deploy and hence you are spending cash.
19:25I think if you're able to draw a line between this, I think that's the right way to move
19:30forward.
19:31But like I said, if a fund's objective clearly states that you are okay with taking cash
19:36flows, I'm okay if the fund manager is taking cash flows because that's communicated and
19:40investors should know about it.
19:42But if there are funds who are not communicating and taking cash flows, that's something that
19:46I'm not really okay with.
19:48That liquidity factor is absolutely key, Kirtan, because I can't remember a month in which
19:53you've seen 90 plus thousand crore of selling by a foreign institutional investor cohort
19:59where you've seen the benchmark fall just 6.5%, where you've seen that velocity and
20:05volume of selling.
20:07But there are several queries that have come through, Kirtan, and I want to take the first
20:11one from Shakeeb who's written in, he's 21 years old and I'm glad that he is starting
20:16his investment journey so early.
20:18He says that he wants to start his investment journey with a 10,000 rupee SIP and a 10%
20:23annual SIP.
20:24His time horizon is 25 years and he's got a moderate risk appetite.
20:29What fund should he consider investing in because it's a very long term horizon?
20:34I think, like you rightly said, I'm really happy that young investors are coming in and
20:39congratulations, Shakeeb, for deciding to start your SIP journey.
20:43There are two things that I am very keenly looking at here.
20:46I'm very happy that the investor is educated enough to understand that he should do a 10%
20:52annual step up.
20:53So many congratulations on that.
20:55And at the same time, the time horizon is very interestingly large at 25 years, which
20:59is brilliant.
21:00But because the investor has a moderate risk appetite, I'm not sure how strongly a small
21:07cap fund would fit in, because in a general context, if you have a 25 years of investment
21:11horizon, I would have really loved to recommend a small cap, but because he's moderate risk,
21:16I'm trying to avoid.
21:17I think you can split your investments across SBI, Contra, ICICI, Large Inmate and Kotak
21:23Emerging by which you will equally spread your investments across Large Inmate, which
21:27is good for a 25 year of investment horizon.
21:31And I'm strictly restricting myself to do anything on the small cap because you've mentioned
21:36that you don't want to take aggressive risk.
21:39Which is perfectly fine.
21:41And I'm glad that he's cognizant of his risk taking ability as well, which is another sign
21:46of maturity and kudos to you, Shakeeb, for having that thought process.
21:50Arun, who is 25 years old, not too much older, Kirtan, and so therefore, congratulations
21:56to Arun as well.
21:57He says he's a state government employee and his goal is wealth creation.
22:01He's probably not thought about what he needs the money for.
22:04His time horizon is 15 years.
22:08He's got a few mutual fund schemes that he's invested in, UTI Nifty 50 Index Fund, the
22:17DSP Nifty Next 50 Fund.
22:20He's got the ICICI Mid Cap 150 Index Fund, the Small Cap 250 Index, Motilal Nifty 250
22:27Micro Cap Index Fund, and the Parag Parik Flexi Cap Fund.
22:31The only actively managed scheme is the fund manager that we spoke to today.
22:35Everything else is in the passive space.
22:38Would you suggest that he change anything?
22:41I think I'm glad to look at diversification across market cap.
22:46He's very smartly put money across everything which was possible from the Nifty to the Micro
22:52Cap Index.
22:53So I think he's done a great job.
22:55My only suggestion will be if you have a 15 year of investment horizon and because he's
22:59not mentioned what's his risk appetite, and I want to assume that because he's got 15
23:03years, he probably might lose out on a large opportunity and hence suggesting to reduce
23:08a little bit of large cap because across UTI 50 Index, DSP 50 Next Index, and PPFAS, he
23:16has a lot of exposure to large cap.
23:18So if we can reduce a little of large cap and spread that across mid and small, it'll
23:23be great.
23:25Elamaran, who is 31 years old, is planning for his retirement.
23:29He's planning to start investing 5000 each in large and mid cap 250 Index and multi-cap
23:35fund.
23:36Is this a good combination?
23:38Large and mid cap 250 Index and a multi-cap fund.
23:41What's the view?
23:43I think I would rather suggest that you go for large, mid and small separately.
23:48Historically, an equal weight portfolio in large, mid and small has done much better
23:54on risk adjusted.
23:55So versus what you're suggesting, I would suggest to large, mid, small independently
24:00and equally invest across them.
24:02I know that you have this view, one third each in the various market capitalizations
24:06and you've pointed out in the past as well that it has done incredibly well.
24:11Kirtan, as always, absolute pleasure having you on the program.
24:15Thanks so much for taking the time.
24:16Alex, thank you so much for having me.
24:19All right, that brings us to the end of this edition of the Mutual Fund Show.
24:22Hopefully, it's been an insightful one for you.
24:24Do let us know what you think about this program and if you've got specific questions about
24:29mutual funds, then you can send them on that number that you see flashing on your screen.
24:33It will eventually come to you.
24:34But do stay tuned.
24:35Lots more coming up over the course of the day.
24:37This is NDTV Profit.