With current volatility in equity markets, Srikanth Meenakshi, co-founder and Chief Operating Officer of Fundsindia.com expects the fund inflow to reduce in equity funds as has been the behaviour of investors in the past.
Investment through SIP route which has taken up a large part of the equity inflows in the recent past may also reduce. However, there has not been an immediate dip in the inflows, although growth of SIP folios has already slowed down with a fading interest in market-linked investments.
In an interview with Moneycontrol, Meenakshi also talked about benefits to mutual fund investors from SEBIs recent circular, investment strategy for short-term investors, advice to investors who have stopped SIPs or withdrawing from equity funds and investing in pharma funds among others. Edited excerpts:
Q. Recently, SEBI has released a circular that tightens the mutual fund industry norms. Briefly discuss key benefits to mutual fund investors.
A. In this circular, there are aspects like abolishing upfront commissions and minor enhancements to disclosure norms. The abolishment of upfront commissions, except in some small set of situations, will greatly benefit the investors in terms of reducing misselling and churning by distributors – especially for NFOs and closed-ended equity schemes.
The key provision of Total Expense Ratio (TER) reduction is not part of this circular and is likely to be announced in a few weeks. That was the biggest investor-friendly move proposed by the regulator during a board meeting held in September.
Q. With on-going volatility in the equity market, most investor’s portfolio has slipped into the red. So, several investors have stopped SIPs or withdrawing from equity funds. What is your advice to this investors?
A. The best antidote for volatility is to average one’s purchase of mutual fund units in the market, by investing using SIP. So, stopping SIPs is the worst thing an investor can do in these conditions – they would literally be selling high and not buying when prices are low.
Given that SIPs form long-term investments, there should be no need to panic at the sight of volatility or downturns in the market. On the other hand, they should be seen as an opportunity to buy more in the market.
Withdrawing from equity funds is even worse since investors will be selling at low points of the market. The only reasonable advice to the investors is to stay invested and continue SIPs in such markets.
Qs. For short-term investors, which category of funds looks attractive?
A. Liquid and ultra-short/low duration funds look attractive at this time for short-term investors. Short-duration funds can also be a good option for those with a slightly longer, say 2-year plus perspective. With interest rates rising, these categories of funds will be able to latch onto to higher coupons quicker and easier than longer-duration funds.
Liquid and ultra-short duration funds hold papers with short maturities. This results in papers maturing quickly in the short term, freeing up the fund to take up fresh issues bearing higher coupons. Funds with longer maturities need time for their portfolios to adjust to higher yields. Second, short-maturity funds are less volatile to any changes in the interest rate scenario compared to longer duration funds.
Q. Do you think thematic funds focussed on pharma sector are attractive after correction?
A. Pharma funds are a very contrarian bet at this time. Pharma stocks have not been good performers for several years now, due to factors ranging from regulatory issues, higher competition and lower margins.
However, many of these issues appear to be resolving. The relative underperformance of the sector in the past few years also offers timing opportunities.
In addition, the listed healthcare space has widened to include the steadier diagnostics business and ancillary sectors such as insurance. This wider universe reduces the reliance on pure pharmaceutical stocks.
Moreover, pharmaceuticals as a sector is also more or less independent of election outcomes. Extremely aggressive investors may be interested in this space. However, an immediate or near-term payoff is unlikely. One needs to be careful in choosing funds with a balanced mix of domestic and international pharma, and related sectors such as diagnostics.
Q. How deep will be an impact on mutual fund schemes holding NBFC stocks? And what should investors do who hold mutual fund schemes with higher exposure in NBFCs?
A. It is not possible to judge the impact of falling NBFC stocks on fund returns. It depends on the extent of the correction and the fund’s own portfolio adjustment. If funds begin reducing stake in NBFCs – and several of them have – the impact could be lower in the short term. Conversely, funds may also look at the correction as a good opportunity to pick select stocks a few months down the line.
When a fund is not a thematic or sector-specific, deciding what to do with investments in the fund based on their current holding is not advisable. A diversified fund by nature would change allocations to different sectors and stocks based on the prospects in those stocks. If outlooks change, fund’s portfolio also changes. So if NBFC stocks’ promise is fading, funds would naturally divest.
Moreover, funds could have other sectors or stocks lagging such as OMCs or cement. NBFCs would not be the only drag in most portfolios. Therefore, acting based on NBFC holding alone would hardly be prudent.
In any case, the idea behind investing in equity funds is to allow the fund manager to identify the best available opportunities and change the portfolio accordingly.
As long as the fund is a quality performer that has shown the ability to weather market cycles and adapt portfolios based on opportunities, it can be held. If not, the call to invest or hold or exit depends on the quality of the fund and not its current holding in specific sectors.
Q. Which category of funds are recommended to new investors in the present market scenario and why?
A. In any market, new investors should enter with caution and invest in funds that suit their needs and time-frames. An investor trying to test the markets can start with an equity-oriented hybrid fund that will moderate the volatility. Anyone starting to invest for the long term can start with SIP in a balanced portfolio. Someone looking for one or two year investment or a replacement to their fixed deposit investments should strictly stick to short-term debt funds.
