'Factor-based indices have been doing quite well lately'

How is your team viewing the current market valuations and preparing for possible corrections?

Though our stock exposures at Samco Mutual Fund are high at the present juncture, the investment team uses momentum and trend-following algorithms to help us take advantage of market gains even when valuations appear high and to dynamically cut exposures when the tide turns. Some funds mandated to hedge may reduce their stock exposures, while others will shift to lower volatility and higher quality names to mitigate downside risks.

Are index and factor-based passive funds a fad or a lasting investment strategy?

If a similar scenario occurs in India, investors in actively managed funds that do not beat the indices may switch to index funds, as we have observed in the more developed and Western capital markets, where index funds have performed better in terms of inflows and returns over the long run. Although timely entrances and exits from factor-based passive funds are important, those funds have their own cycles. While factor-based indices have been doing quite well lately, their popularity may decline if these funds perform poorly.

Will AI impact your business? How and why?

Based on its current capabilities, AI looks to be able to handle a lot of mechanical and repetitive tasks. This will help us because it will free up resources for more important tasks. On the contrary, we refer to our mutual fund as system-based and take our cue from Sir Jim Simons' vision of becoming a 100 per cent machine-driven mutual fund.

Rapid-fire questions

• If your fund house had a superpower for investors, what would it be?
  The market will always react to something, and mostly, it overreacts. If investors had the superpower of emotional intelligence, they could think sensibly and apply logic when emotions are running strong. A person with mental stability may be able to distinguish themselves from those who merely strive for success.
  
• The biggest mutual fund myth you'd debunk.
  That most investment techniques are a blend of art and science and heavily rely on subjective opinion. Over an extended period, this assessment might not always be correct (this is also a reason why most active funds underperform the Western indices). When a strategy is entirely scientific, it can assist with investing without introducing too many personal biases and can be updated to reflect the constantly shifting dynamics of markets.
  
• An unconventional asset class you'd add to your portfolio.
  Precious metals. In fact, we want to launch a fund shortly that will enable us to capitalise on this perspective.
  
• A Bollywood movie that best represents the mutual fund industry today.
  Guru, which shows a new participant's difficulties in an established institution and how he overcomes them, resonates with me. Such stories are engaging due to the player's mindset and the desire to rise from nobody to somebody, especially when there's nothing to lose.

This article was originally published on November 05, 2024.