Subscribers' Hangout: June Edition

Dhirendra Kumar: Welcome to our periodic connect with you, in which we will answer your questions. The Premium users keep sending us the questions, and we will try and answer all the questions which are of wider interest. Of course, we get plenty of it. And some of them are very specific to your own portfolio. We would not like to reveal that. Of course, the service does not have a provision of one-to-one advice. We are not a one-on-one advisor. But we have devised everything in a manner that you can do things with confidence without seeking any advice. But to do that, you need clarity in terms of how we do things. What is the thinking behind it? What is the framework of our advice? How to use the service more effectively? And with that in mind, periodically, we will come back to you and answer your questions. So, send us your questions - everything which you think will help you use the service better. If you are curious about something that how are we doing it? What is the basis for that? We will be able to explain everything because nothing that we do is not thought out, based on our experience of 30 years. My team with you, which you can see here, are the people who work on different aspects of the service. They are the people who do the Analysts' Choice, or they will be devising the Portfolio Planner. Ashutosh has been involved from the outset in terms of designing the service in terms of the basic contours. Because we don't have a reference for this service, we don't have a comparable service of this kind anywhere else. Of course, it is too late. We started this service at a point where the last-minute planning was not executed well. It happened at the outset of the lockdown period, we were working on this service, and then the lockdown happened. And then we hurried our launch. And we did not prepare much in terms of explaining what we are doing and why are we doing. So we are using, and now a lot of you are using the service and a great occasion to answer those. So I'll start with the questions. This is from Amit, who is asking what are the parameters on which you evaluate mutual funds? How do we evaluate mutual funds? So I can answer most of these questions. But I would actually toss these questions to the specific people who are responsible for dealing or handling this or thinking about it more intensely all the time. So I will toss it to Ashutosh, who has been involved with me in devising this service. Ashutosh Gupta: Sure. Thanks, Dhirendra. So the idea is that even before we select, we reject a lot. So in that sense, the service is more about rejecting before we arrive at a very curated list of funds. And the first step is always quantitative. Because in our experience, we've seen that it's the numbers which very objectively convey the conduct and the accomplishments of a fund. And a lot of rejections happen at that stage itself. Beyond that, things get qualitative, where the idea is to get to know the people behind those numbers. And we don't like to make changes to our recommendations often. And that is only possible once we know the people well because rough phases would come, but it is about getting to knowing those people, which helps you stay the course. So we speak with the fund managers to try and understand what do they think. What are their boundaries? What is it that they will never do? And these are the kind of questions which provide some strong anchors. So broadly, that is what goes into the mix. But then things are very different for equity and debt funds, and talking about equity first, the key question that we look to answer is that do we have the best value and the best growth fund managers on our list? And there are quite a lot of numbers that we look at. One of the most important things is consistency of style. So over different market cycles, has the style of the fund manager remained consistent enough?So we exactly know what we are getting into. Then, of course, performance matters. So we are looking for a good long-term track record of performance, even though that comes with intermittent phases of underperformance, which I think any fund is bound to go through. Then, for us, the replicability of those numbers is very important. Of course, we don't know what future holds, but performance records built upon too many opportunistic calls going right in a span of time or numbers which are built upon just one or two years of blockbuster returns, we are sceptical, and we are cynical because we are very unsure about its replicability in future. And then another dimension that we very closely look at is the stability of the fund management team. So that we can attribute those numbers to the people who are running the show at the moment. Beyond that, there are certain other factors like costs. For instance, of course, they are more relevant on debt, but we keep an eye on the equity side too. And then there are other avoidable risks - things which don't smell well, things like too much investment in promoter group companies or open-end funds investing too much in closed-end funds. These are the things which we look at with suspicion. And then I'll just spend a brief amount of time talking about the debt side of things where, clearly, the risk side of the equation takes precedence. Because fixed income investors, they don't like negative returns even over a very short span of time. And therefore, the whole orientation is about risk mitigation. And we believe that a great fixed-income portfolio can be built with just two funds. So we narrow down the universe very consciously to keep things simple, to avoid the clutter. And that reflects in our list of recommended funds on the fixed-income side. And as far as the numbers are concerned, so the key question that we try to answer is that what does a fixed-income investor really need? These people are still anchored to fixed deposits. And what they're looking for is returns which are slightly better than those, but come without any big risks. And our whole orientation around fixed income funds evolves around that. So we are looking for funds, which do not take any big aggressive bets either on credit quality or interest rates, have a nice clean track record of picking up strong credit

This article was originally published on June 15, 2023.