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Dhirendra Kumar's top multi-cap fund picks for new investors

In an interview with ET NOW, Dhirendra Kumar sheds light on investing in actively managed funds over ETFs & reveals his favourite ones


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Axis Multicap Fund, Quantum Long Term Equity Value Fund and HDFC Equity Fund are some of the multi-cap funds that new investors can opt for, suggested Dhirendra Kumar, CEO, Value Research, in an interview with ET NOW. Edited excerpts:

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What explains the kind of ETF inflows that we have seen, which have largely been responsible for the March rally in the markets?
Let me first clarify that the ETF inflows are not discretionary but very programmed flows. Most of the money coming in these ETFs is from the NPAs as well as the EPFO. SBI ETF Nifty 50 has turned out to be one of India's largest equity funds, which started its journey only in July 2015. Every month, the salary of individuals gets deducted and 5 per cent of it finds its way in this ETF. With a total AUM of Rs. 46,000 crore, the median flow in this fund during this period is nearly Rs 900 crore per month. Not only that, it keeps on increasing because when salaries get revised, this 5 per cent incremental flow will also go up.

Further, the 5 per cent allocation to equity from EPFO can increase, as they have permission to increase it up to 15 per cent. So, it will steadily go up. They are just testing the waters and they have found this to be a good neat vehicle. ETF is a nice way for institutional investors to invest because you just settle to be an average and not aspire to beat the index. You do not want to take the blame of underperforming the index. But at the same time, whatever research analysts say, people do not get up on January 1 every year to invest in an ETF and take their money out on December 31.

People earn, save and invest. They invest their long-term money in equity and they should ideally be investing regularly. This ETF has presented a case and large-cap funds have definitely lost a plot because of very understandable reasons. Two things - one is that 2018 was a very unusual year when two of the biggest positions in Nifty suddenly did exceptionally well after seven-eight years of slumber. That apart, they had a rating in the index because our indices are not created to mount funds on that. They have the kind of weight that mutual funds cannot have.

In fact, there is a regulatory ceiling that their allocation to a single position cannot be what weight in an index can be for top holdings. So, it was a very skewed index. That apart, mutual funds are at a great disadvantage because they are damn expensive. This ETF costs 10 bps. Other large-cap funds cost around 2-2.5 per cent. So, mutual funds have to certainly generate alpha of 2.5 per cent to match the index, leave aside beat the index.

But I still feel that the case for investing in an actively managed fund is very compelling. The alpha gets created by your nominal allocation to mid- and small-cap segments of the market or non-index allocation or even a variant of the allocation. If you drop the PSUs from the index, your index looks much more handsome. Simple value additions can be done on these indices by fund managers. Of course, the cost is an advantage and settling with average is basically saves your job proposition. It works nicely and it will keep growing.

You are talking about how flows that we have seen into ETFs can largely be attributed to the EPFO and the NPS. But from an investors standpoint, there is not too much of interest. Can you explain how there is no allocation to mid and small caps as that's where the alpha is?
No, I do not think so. I would say alpha in a large-cap universe can also be added. You do not have to discover something when it comes to limiting yourself to a large-cap universe. Alpha gets created only if you are able to avoid and emphasise on something that you think about. But the cost disadvantage is there, as you have to beat the index by at least 2 per cent.

Below 50 companies, below 100 companies is where you come across multibaggers. Also, investors do not invest on a yearly basis, as they want to accumulate substantial savings. That apart, the equity returns will always be very lumpy. When you look at any 5-year, 10-year or 15-year period, based on point-to-point as well as SIP return, the actively managed funds 90 per cent of the said time period actually beats the index. When it comes to looking at a few special years, mutual funds look very bad. 2018 was one such year, 2008 was another and so was 2013 where most funds struggled. But as said before people just do not invest for a year.

You believe that investors really should not be looking at ETFs as a lucrative option. Where exactly then do you see value for them to invest in?
Investors should be guided by more than ETFs or actively managed funds. If you are able to invest regularly, then be it ETF or actively managed funds, you will be able to beat the index. Besides, in India, if you are investing for a period of five years and more, you should be investing in a not so large multi-cap fund because when multi-cap funds turn large, they are forced to become large-cap oriented, having all the odds against them.

If you are unable to do that, you can use the ETFs as a very low-cost vehicle to ride the markets with great uncertainty. Maybe one should have a 70 per cent allocation to these funds and the remaining 30 per cent in mid and small caps. This way, you will able to create your own multi-cap portfolio, with 70 per cent of money incurring very low costs. However, an investors' discipline and timeframes are more crucial ingredients for financial success or reward from equity than choosing the best vehicle.

What are the three recommendations from you for multi-cap funds for those who want to make fresh allocations?
There is a problem of plenty. I would say that you can look at the same old Franklin India Equity Fund (erstwhile Franklin India Prima Plus). There is a huge problem with the multi-cap category that as the good ones succeed, they get so much money that they are forced to become a large-cap fund. But I would say that Axis Multicap Fund is still a very promising one.

Some value funds look very promising as well and they are going to remain size agnostic in terms of their investing anywhere kind of attitude. In line with the same, Quantum Long Term Equity Value Fund can be considered, too.

Likewise, I would say that some of the HDFC Funds, especially, HDFC Equity Fund is getting its momentum back and looking promising. Maybe, now the worst might be behind them.

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