Excerpts from CNBC-TV18's exclusive interview with Dhirendra Kumar:
What is your take on Reliance Diversified Power Fund?
This has been a good fund, but off-late it is performing poorly. It is a sector fund which invests only in power stocks. It has spread into other energy sectors as well. Though it is a good sectoral fund, it doesn’t mean that investors should buy it. It’s unfortunate that this fund has been lapped up by most investors as it is the only story going in town. It has become the largest open-ended equity fund in India, which is the most surprising for a sectoral fund. Most investors can do without this. It is dangerous for investors to be heavily invested in this fund and could prove very disappointing. Investors should have a sense of balance and proportion. They should have 10% of their portfolio in such a fund. This story still has to unfold and the fund still holds promise but don’t get overloaded.
How much should an investor invest in a sectoral fund? How important is diversification of mutual funds?
Investors should not invest more than 10% to 15% in any sectoral fund. Even if the power sector does well, other equity funds will load themselves with power stocks, so your portfolio will be heavily tilted towards a particular sector. Diversification is the mantra for most individual investors. There is no guarantee that it will save you, but it will certainly be able to provide you with a relatively balanced portfolio.
Which will be better for a new investor to invest, diversified equity fund or the sector specific fund?
A good diversified equity fund is the best way to get started for anybody looking at regular investing for three years and beyond. Investors could look at a Reliance Growth Fund or any of the top rated funds with a history of over five years like HDFC Top 200, DSP Merrill Lunch Equity Fund or Kotak 30, or Franklin India Prima Plus. They could look at any fund which has an over five year history, has been able to withstand a down market, was able to reasonably participate in the upswing, and has been able to provide relatively superior risk adjusted performance. These funds have been able to do it. I don’t think a sectoral fund is a good vehicle to provide superior risk adjusted performance consistently.
Should people buy gold exchange traded funds or the ETFs?
If one understands what one is buying, just go ahead and buy it. To buy a Gold ETF, an investor requires a demat account. This is however not applicable if one wants to buy a mutual fund. Many investors were excited about it two months back as it was doing well. Gold ETFs have done well over the past 36-42 months, but gold is not a great hedge against inflation. It does not have a long-term performance history or makes a compelling case like equities.
Equities have time and again proved to be the best performing asset class over a period of 5-10-20 years. For the past five years gold had a good run. Maybe three-four years back it was a good time to invest in gold, but individual investors didn’t have an opportunity then. If one is personally convinced about investing in gold, it is to ones’ advantageous if one buys an ETF rather than holding it in physical form.
Would you suggest investors to invest in mid-cap funds? What Returns should be expected?
One should be aware of the risk of investing in a mid-cap fund. For somebody getting started, it could prove to be a test of patience. Over the past five years, equity funds on an average are up about 31%. Magnum Global has given a 45% return, so on a five year basis aiming at 15% differential returns year-on-year is great. So, here is a great mid-cap fund. But over the past one year, we saw bad markets with mid-caps really struggling. Equity funds on an average are down about 35%, while this fund is down about 43%.
If an investor is investing with a 5-7 years horizon, this is a great mid-cap fund. However, if he is investing with a 1-2 years horizon and needs to take his money out, he will be out of patience while building up his portfolio. So, this is not a fund for the faint-hearted.
Stable investors, investing for many years, should not have more than 30-35% in mid-caps, or mid-cap funds. Here a fund manager has a very crucial role to play. In a large-cap fund, the difference between a great or not so great fund managers isn’t that substantial. In the case of mid-cap funds, because India provides a very large universe of stocks to choose from, one needs to invest in a fund whose fund manager has an advantage or instinct to identify things ahead of market, is able to take it over time, and is able to add substantial value to a fund’s performance. Hence in the case of a mid-cap fund, a fund manager has a meaningful role to play compared to a large-cap fund. So, choosing a good fund is crucial and it shouldn’t be more than 30-35% of ones’ overall portfolio.
What is your understanding of HDFC Top 200 Fund? Should investors invest in it?
The fund has a good combination of large-caps and mid-caps. It has a good and long performance history, and continuity of fund managers. One should be watchful because though HDFC Top 200 remains an impressive fund, other equity funds in the HDFC fund family are slipping on performance substantially and consistently over the past 12-18 months on a relative basis. So, one should be watchful of this fund because other funds in the same fund family are not doing as well or are losing their charm rapidly. But this remains a good fund so far.
What opinion do you hold on the recent performance in the HDFC stable?
Here is a fund family whose equity funds became conservative in a roaring market little ahead of time. So, there is conservatism driving this fund ahead of time and missing some of the big calls. It took some calls which were very awkwardly placed. For instance, it kept away from banking for a long period of time and when it got completed overheated many of the funds were loaded.
Similar such instances actually lead to a drag in performance on a relative basis. Over the past 12-18 months, the fund lost its charm relative to many others. In the last part of the roaring market, it wasn’t there. Unfortunately, its conservatism didn’t pay off in a falling market. It fell just like an average equity fund. Somehow the complexion of decline and rise was such that the funds strategy didn’t way out well.
Before concluding please give us your view on, HDFC Mutual emerging as the second largest equity fund house in the country?
If a mutual fund company has penetration or great appeal to individual investors, and has a long history of good performance, it can tide over a patch of bad performance. I would not suggest that investors run or keep away from HDFC funds, but surely these funds are not as good as they were. HDFC equity funds were in the top recommended funds for logic, rational, and performance about two years back. I don’t think they will qualify at that level again.
What investors chose today may not necessarily be the best fund. In 2007, big money came into a fund which had no performance history. In fact, Reliance Mutual Fund has rapidly been able to build substantial assets under management, or AUM in its equity fund. It has performance history in one-two funds, but has attracted money in most other funds where it still has to prove its mettle.