Excerpts from an ET Now interview of Dhirendra Kumar on investments ideas and how investors should approach mutual funds
ET Now: I am delighted to see that the SIP culture has picked up. Why do you think it has picked up?
Dhirendra Kumar: It is due to a combination of things. During last year's turnaround in markets, a lot of investors were caught unawares. Most of them gave up. They were disappointed and it was extremely difficult to get them back. They sat on the sidelines and missed the whole turnaround. Now they have realised their folly.
Besides, with regulators providing the B15 city incentive, mutual funds are going into smaller towns. They are being incentivised to sell in those smaller towns. People see this as an opportunity. The market appears risky when you look at it on a day-to-day basis, but the kind of money that could be shifted shows a very different picture.
There have been many case studies of late. A person who invests in tax-saving funds and stays invested there makes money at the end of the day. Eventually, it turns out to be very profitable. Such word of mouth has boosted the SIP culture. There are 80 lakh people who have their account in NPS. That means mandatory saving has found its way into 80 lakh accounts. It is quite significant; it is beyond the discretionary SIP accounts set up by individual investors' which is about 75 lakh now.
The NPS account is a big demonstration of SIP. It is quite disappointing that what should have started in 2004 started only in 2009. So, it missed the big rally.
ET Now: How does one make the most of this SIP wave? With markets picking up right now, what could be the best funds to put money in?
Dhirendra Kumar: One should go by simple principles. It is extremely difficult to time the market. One can't have fun while trading in the market. Risks are bigger for the individual investors; odds are often stacked against them. Before picking funds, one should have a close look at their history. Also, have a look at the experience of the fund manager. That is how I recommend funds.
More importantly, an investor has to stick to his own plan and timeframe. The broad principle should be that if you pay taxes, choose the tax-saving fund and do your SIP. If you have never invested in the market, you will be extremely disappointed if there is a 20% decline. So, prefer the balanced funds. Or you can choose the funds that we recommend. Some of these funds have a history of generating three times more return than what a fixed return product could have generated.
A lot of investors are entering the market or mutual funds for the wrong reasons. They just look at the last one year's return, and they get attracted. That is a wrong way to start investing.
ET Now: Some SIP starters think they should stick with just one fund, but some others may want to distribute it among two or three funds. What according to you is the ideal strategy in this regard?
Dhirendra Kumar: If you are investing ₹5,000 in a small town, one balanced fund will get you most of the benefits of diversification across assets. Even by investing in one fund, your portfolio will be diversified across 40-50 stocks. That is not bad.
If you add four-five funds of a similar kind, you may get the impression that your money is getting diversified. But it's actually not so unless you are going in for non-correlated assets. Only if you have a number of midcap funds and a number of large cap ones, you will gain from diversification. But not otherwise.
For most investors having a tax-saving fund, one or two equity funds should be more than enough. Anything beyond that only marginalises your returns.
ET Now: We get NFOs now on a daily basis. On a daily basis, mutual funds are launching exotic schemes, some are promising you growth on China, others are betting on growth in US, some are even giving you promise of prosperity if the Brazilian economy picks up. What is your take on some of these exotic schemes?
Dhirendra Kumar: My understanding is that most mutual funds investors should keep away from any such stories. The reason why investor should come to mutual fund is very simple. Diversification, belief in equity and their own discipline, the ability and convenience to invest your ₹5000, ₹2500 a month in a diversified portfolio. Having the belief in stocks, having the belief in ownership of businesses, that is a core of equity investment.
All the exotic schemes are against that principle. You are basically concentrating instead of diversifying when you are doing that. If you are investing in a Brazil fund or if you are investing in a gold mining fund and that is 3 per cent of your investment and you have some specialist knowledge that could be a different story. However, most investors will be well off by keeping away from any such idea. The other disadvantage of investing in any such idea is that those funds or those ideas gain prominence or investors invest in those only when it is inopportune, only after they have done well. This is because the favourite pastime of investors is looking at past performance and liking an idea, which is just the wrong thing to do.
If you look at what happened in all the funds which are struggling today, they got most of the money when it was most unsuited for investing in them. That in itself eliminates the possibility or eliminates the need. Once in a while, there could be a situation; in Indian mutual funds history I have seen only one or two situations when an exotic fund at that point looked interesting. For example, the launch of a liquid fund was a very interesting prospect; it was an exotic product when it was getting started. When the first technology fund was launched in 1998-99, it was an exotic idea. Most general funds, most diversified funds, we used to keep away from technology exposure. Therefore, once in a while, it might make sense, otherwise not.
ET Now: What viewers would want to know if they want to start investing in one fund, which is that fund that they should start an SIP in?
Dhirendra Kumar: If you have no tax or need to save for taxes, it should be a balanced fund.
ET Now: Which one?
Dhirendra Kumar: There are quite a few balanced funds. If I have to list two-three of them, I can safely say that it could be ICICI Prudential Balanced Advantage, Tata Balanced or maybe Franklin Balanced.
ET Now: Tell us a little bit more about the rationale behind calling Franklin Balanced Fund one of the top funds right now? What works for this fund and why should viewers put in an SIP with this fund?
Dhirendra Kumar: I was answering about a balanced fund mainly in the context of a lay investor, who has never invested in a fund, having to choose one fund. Which fund should that be, that is what I was answering. A balanced fund was an answer to that question. However, the balanced funds which I have referred to are not the best performing balance funds. They are genuinely a balanced fund because they do not get very concentrated with their equity portfolio. They do not pretend to be a balanced fund while behaving like an equity fund. Therefore, moderation of risk is the key, because most investors dislike extreme decline in value as and when the market conditions change. That is to have belief in the system, to have a belief in an investment which does not crumble. That is why I was referring to a balanced fund.
ET Now: People identify you as somebody who is a veteran of mutual funds. However, I am sure you do not invest only in funds; you probably diversify your investments across asset classes. What is your current investment outlay looking like in terms of what do you do with incremental money currently?
Dhirendra Kumar: No, in fact I have been a mutual fund guy and I do not have a stock portfolio. I have few investments which are entirely part of my inheritance which I have done nothing about.
ET Now: Non-equity?
Dhirendra Kumar: Non-equity, I do not have anything. I have no other investments. In fact, I owned a house which I still have not been able to live in that and that is my thinking. I have no other assets except my investments in mutual fund and some money in my savings bank account. Of course, there is another way of looking at it, that I own a business.
ET Now: And Value Research clearly needs no introduction whatsoever.
Dhirendra Kumar: Value Research was founded by me about 25 years ago and in that sense, my investments are in mutual funds. I run a business which has been a profitable business; it has been a very conservative business. We never took any external capital and we never borrowed.
ET Now: I am guessing with the bear phase which has started in commodities, gold ETFs would be a strict no-no?
Dhirendra Kumar: Absolutely. In fact, on gold ETF, my view, even in the heydays, has been that never get into it. Look at gold as a consumption and do not look at it as an investment. I have been right of late. I still feel that the fundamental reason why people should not be looking at gold as an investment is that it does not produce anything, you are not lending money to somebody, and you do not own anything.
Something happened to gold five years ago which led to this whole situation. It was a blockbuster for some external reasons. The whole world was scared, equity crumbled, global financial crisis, financialization of gold. All these variables are now changing and gold is not supposed to be used for beating inflation. That is what the focus of any investor should be, to be able to beat inflation so that your money grows in real terms. That is something that gold cannot ever do.
This TV interview was originally broadcast on ET Now on 22nd July, 2014. It is also available on the Economic Times website at http://economictimes.indiatimes.com/opinion/interviews/pick-the-right-fund-and-stick-to-it-dont-diversify-unnecessarily-dhirendra-kumar-value-research/articleshow/48171074.cms