Before I venture into questions for the new 2020, let's flash back to 2019 for a while. How was the last year for mutual fund investors?
Dhirendra: It was a mix. Purely based on performance, it was not an outstanding year and it was not even a disappointing year. It was an average year. Despite all the turbulence, equities did somewhat okay. But they did not do very well.
Fixed income was quite a teaching. Investors learned all that has been said that mutual funds are subject to market risks. Investors actually experienced that risk. But the fallout of this was that mutual fund regulators got into action.
So the bad part was that it was a lacklustre year on a performance front. But the good part was that mutual funds became less expensive, they became cheaper. They also became purer with the classification system getting implemented. Now, what you see is what you get. Small-cap funds will remain small-cap, a mid-cap fund will be a mid-cap fund and likewise for other categories. Even in fixed-income categories, the funds are what they are said to be. But it has a different problem - the problem of plenty. So mutual funds became clearer, purer and cheaper.
They also became safer as a result of the entire fixed-income crisis that we have seen. Some of the bonds bought by these funds were unable to honour the promise of timely repayment of principal or interest. They defaulted. But this led to the creation of segregated portfolios, which is generally called as side-pocketing. And that's a good thing. It is a nice regulatory move which actually ensures that any money which will be recovered in future will get back to the investor who is actually entitled to it. So broadly, I would say that it was the year which actually gave investors the lesson and regulators tightened the whole framework.
What about equities? They also had a roller-coaster ride in 2019.
Dhirendra: Equities are like that only. That's their nature. The fact is that whatever we may say, the equity market is primarily driven by companies making more money than they made in the past or the likelihood of them making more money in the future. Right now, companies are not making more money, they're not growing faster. Primarily, there is a hit on the earnings growth.
But it is very normal. Markets are cyclical and so is the economy. I think this cycle can linger for longer simply because the operating system of the nation, the business framework and the economic framework is changing. A lot of things have changed. And I think they have changed in an irreversible way. So the result of all of this is that businesses will face some problems and it might take longer for earnings momentum or earnings growth to come back. But it surely will come because the whole India story remains intact.
But of course, one also sees the narrowness of the market that is there. It has led to a lot of investors asking the question that they were betting on the small caps, mid caps, multi-caps, but the large caps have started running up and not the whole market. So that remains a problem. But I would say the same thing which we keep repeating all the time: don't get distracted from the core principles of your personal finance that you follow.
So should one go with large caps or should one stick to multi caps?
Dhirendra: I would say that, the pursuit of simplicity should not be compromised. We see that multi caps returned little less than large caps last year. But the fact is that multi caps themselves invest 60-70% in large caps. So by investing in multi caps you are not deprived of large caps. You are anyway investing in large caps. Selectivity works there. A fund manager of a multi cap fund has the leeway to invest anywhere and change their position between different parts of the market.
But if you invest in a large cap fund, the fund manager is restricted to invest only in large caps. He cannot deviate from them even during the period when large caps don't perform well. Large caps were up 11% in 2019, around 1.5% more than the multi caps. But look at 2017, multi caps returned 37% while large caps were able to generate only 30%.
Markets are unpredictable even when markets do well. Which part of the market will do well is very hard to guess. So an investor who is looking for a low maintenance portfolio, should go with a multi cap where the fund manager has complete flexibility. After that, you don't have to intervene to anticipate which part of the market will do better. Don't try to over-engineer things. Keep it simple and stick to your plan.
So in the current scenario, what are the mantras or the investment plan that you would suggest to an investor for 2020?
Dhirendra: I would say the same old stuff. If we were talking about this in 2001 or 2011, I would have said the same things. These are the basic principles which are non-negotiable.
- Aspire to beat fixed-income returns when you are investing with a long-term horizon.
- Invest only that money in equity which you do not need for at least 5 years or more. Otherwise you will get anxious about it.
- Don't try to time the market. Be a regular investor.
- Diversify. To put it simply, invest in multi caps or even better, aggressive hybrid funds. You get greater diversification with even more stability because it includes fixed income as well.
- Stick to your asset allocation and rebalance periodically. One easy way to do that is by investing in hybrid funds.
- And as you get closer to your goal do the reverse what you have been doing. Start withdrawing systematically, around a year or two before your goal falls due. So that you are not dependent on the market.
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