TO BUY 7 MUTUAL FUNDS This September

TO BUY 7 MUTUAL FUNDS This September 

Lohit Bharambe and Yogesh Supekar track the trend in mutual fund investing in India and, in association with Neerja Agarwal, bring to you 7 of the most promising mutual funds to invest in, “THIS SEPTEMBER

RISING RETAIL INVESTORS IN INDIA 

Indian equity markets may have entered into a consolidation phase currently after hitting record highs but the markets for sure are witnessing good amount of interest from retail investors in India. In fact, the domestic investors' participation has been the highlight of Indian equity markets since last couple of years. 

It looks like equity culture in India is finally making inroads. For this, lot of credit should go to the mutual fund industry for spreading awareness on the asset class that has outperformed all the other asset classes in the long run.

The irony of Indian equity bull run has been the lack of participation from Indian retail investors, so far. Retail investor participation in India has not been impressive even as foreign investors were seen lapping up Indian equities since the dawn of liberalisation and economic reforms. Every nation has its own investing culture and it is a wellknown fact that nations such as the Unites States and United Kingdom lead when it comes to equity investing.

The World Bank gives importance to the ratio of stock market capitalisation to gross domestic product (GDP) and includes it in one of the hundreds of parameters in judging the economic development of the nation. India’s stock market capitalisation to GDP ratio was 12 per cent in 1990 and now it stands at around 96 per cent (as on August 2017). The Indian stock market capitalisation rose from $13 billion in 1990 to $2.36 trillion (August 24, 2017); that is ~181.5-fold increase. 

What is interesting to note is that the rise in the valuation of the Indian stock market was hitherto driven by foreign investors. Foreign investors alone invested a net amount of $183 billion in the stock market since April 2000 till December 2016. The retail investors' participation has been paltry in comparison. 

The retail participation has not only improved in mutual funds but also in the life insurance segment. Life insurance AUM has reached close to Rs30 lakh crore in FY2016-17, thus reflecting a steady growth of 19 per cent for the period. This growth in life insurance industry was seen due to increase in new business premium and increased persistency ratio. The growth in AUM could also be due to a healthy rally in equity markets. The investments in ULIPs (Unit Linked Insurance Plans) showed a steady growth of 27 per cent, reaching Rs7.50 lakh crore. This reflects that the insurance industry is gaining momentum. 

We can safely say that due to extremely good performance of equity markets last fiscal, the participation of retail investors increased in both the mutual fund industry and the insurance industry. 

INVESTORS PREFER SIP ROUTE 

The SIP route of taking exposure to equities in India seems to be the flavour of the season once again as more and more investors log in to invest in their

preferred mutual fund scheme systematically. According to CAMS data, there are almost 30 lakh SIP accounts with ticket size ranging between Rs1000 to Rs2499, out of which the B15 cities have almost 27 lakh such accounts. While the same data source suggests there is someAMFI data shows that the MF industry had added 8.23 lakh SIP accounts each month on an average during FY2017-18, with an average SIP size of about Rs3,250 per SIP account.traction seen in the SIP ranging between Rs2500 and Rs4999, it clearly reflects that majority of retail investors are willing to test waters with smaller ticket sizes in equity markets by taking the SIP route for MF investing.

Even today I see there is lack of awareness about mutual fund investing in B15 cities. As a MF distributor, I am conducting lot of MF awareness programmes, but I do feel more needs to be done when it comes to creating awareness. I see that the ticket size of SIP is between Rs5,000 to Rs10,000 per month for my basket of investors. Most of the investors come seeking for MFs in the mid and small-cap space. 

Sachin Rane, MF distributor

INVESTOR SHOULD FOLLOW THESE BEST INVESTMENT PRACTICES 

1 Understand that equity markets are volatile and not risky
2 Financial goals are as important as fund performance
3 Investors should not change their financial goals regularly
4 Funds should not be judged on their short-term performance or past performance
5 MF performance should not be checked daily or weekly
6 The expectation of returns from MF investments should be realistic

Busting The Myths Of MF Investing

Five-star rated funds will always give you good returns: 

There are several reputable mutual fund ratings agencies and they rank funds using their unique methodologies which have a clear bias towards historical performance. Investors should not always assume that these five-star rated funds will provide superior returns. It is possible that a lower star rated fund may outperform the five-star rated fund. Also, it is possible that a five-star rated fund becomes a four-star or a three-star rated fund next year. 

SIPs mean you will never lose money : 

Merely by taking exposure to the equity markets via equity mutual funds and opting to invest through the SIP route does not mean that you will never lose money in the market. The probability of loss does come down drastically, but simply by adopting SIP route one cannot stay risk-free. 

Mutual fund investment is risk-free : 

Even though most of the mutual funds advertorials do highlights the message that investments in mutual funds are subject to market risks, we find that most of the investors do not understand what are market risks and lack awareness on the risk front. While investors should remember that markets are volatile and hence risky, there is always a chance of capital erosion.

 Investing in a fund managed by a 'Star’ fund manager guarantees good returns : 

There is nothing called guaranteed returns when it comes to equity investments and same applies to mutual fund investments even when the fund is managed by a ‘Star’ fund manager. Therefore, while investing, investor should not blindly follow star fund managers but select only those funds that meet their investment objective and risk appetite.

Demat account is a must for MF investing : 

While mutual funds can be bought through demat account, it is quite possible that mutual funds can be purchased even by those people who do not have demat accounts. One has to simply fill the KYC form providing details of PAN card, name, address, etc. and start investing in mutual funds. 

Mutual Funds are restricted to domestic markets : 

There is no dearth of investment options via mutual funds in case one needs to take exposure to international equities. Sitting in India, one can now take exposure to Korean, US, Japanese, Chinese and other emerging and developed markets. 

Only those funds with large AUMs are good for investment : 

Bigger funds advertise more and are more popular with the investors. However, the fund size should not matter to the investors as there are several instances where it is seen that those funds with smaller AUMs have outperformed the benchmark index. The table below highlights how some of the equity funds with comparatively smaller fund sizes are outperforming the benchmark indices and providing healthy returns to the investors.

❝Investors need to be prepared for increased gyrations in asset prices❞
- Saravana Kumar, CIO, LIC MF

What is your view on the markets for H22017? 

We are quite constructive on the equity markets for remainder of FY17 due to India’s macro-economic construct, undergoing structural changes and likely improvements in the corporate profitability. Due to recent rally in equity markets, we have turned cautious tactically. At elevated market levels, valuation multiples themselves bring in implied risk. Our thesis is H2FY17 would see more strategic steps towards solving some of the structural issues faced by the economy and would also see renewed interest in completion of earlier initiatives. Though valuation is a cause of caution, we remain positive from longer term perspective. 

How has the Q1FY18 earnings season been? What is your expectation on earnings in the coming season? 

Q1FY18 was quite a mixed bag. The corporates were occupied with getting ready for and implementation of GST. GST destocking clearly had repercussions on consumer companies. Most impacts were in line with what was envisaged earlier. Financial houses were occupied with concerns on assets performance. Macro factors like rupee appreciation impacted export oriented industries like IT and pharma. Normal monsoon till date, stable currency and abating pressure on asset quality are key themes for upcoming season. Some companies which are well prepared for GST may be able to deliver surprises on account of efficiencies achieved in supply chains. Directionally, this quarter would also provide more clarity on real impact of GST as well efficiency gains to be expected. 

What are the key triggers for the markets that one should watch out for in the coming year? 

We have seen solid inflows into mutual funds as investors adjusted their asset allocations across various asset classes. Domestic inflows, changes in political situation are key variableHow do you analyse the
geopolitical situation around the
world and its impact on Indian
equitiess to be tracked for next few quarters. Improvement in earning can be expected from (a) banking system which should see reduced pressures due to improvement in asset quality and (b) efficiency gains in other sectors. Efforts to resolve NPL issues will provide reset to capital structures; it is likely to be precursor for the long term growth of various sectors. We expect private capex to see renewal, similar to what we are experiencing in refining and fertiliser sector. Steel sector is expected to see revival as profitability improves on account of cyclical recovery. 

Has time come for investors to look at passive investing or you believe one can still get more returns by investing actively?

Recently, we have started hearing a lot about the index funds, but the first index fund was set up in 1975 by John C. Bogle under the Vanguard group. Over the course of time, passive investment will beat out some, but not all active management. People will always seek superior returns. The point of active management is to beat a benchmark on an annualised basis over the course of an investment cycle and not just mimic the benchmark. A fund manager need not beat the benchmark every year, but should beat the benchmark on an annualised basis over an investment cycle. A majority of managers who underperform their benchmarks regularly over the course of an investment cycle do not have the majority of investor's sticky assets and the fund managers who are better performing are holding the majority of the investor’s sticky assets. As a result, sophisticated investors who are sticking with their assets with the managers are getting rewarded for risks of active management. 

Which sectors you believe will outperform in the coming year? 

Many sectors are due for revival in upcoming year: (a) banking sector should revive in coming four quarters due to improvement in their asset quality (b) IT should see revival from improved demand outlook and stable currency (c) infrastructure may see uptick due to renewed focus from government. It should see recovery led by investment in road sector and transmission investment. Infra investment should help ancillary investment also. 

Sectors like pharma, IT provide valuation comfort, hence change in direction of these sectors should result in significant performance from the returns perspective. 

How do you analyse the geopolitical situation around the world and its impact on Indian equities? 

We follow bottom-up strategy in portfolio construction. We hence consider these risks at each and every investment level – our each investment thesis is vetted for these risks before we take position in that investment. Intuitively for us, it makes a lot of sense as these risks have dissimilar repercussions on various businesses.

Going forward, we perceive escalated geopolitical risks for the market. Tensions are seen at multiple national and international levels. We are quite positive of the Indian story from a 3-5 year perspective as we believe any geopolitical risk would have a medium term impact. However, the long term story should remain intact. Investors however need to be forewarned about contagion nature of such events. Investors need to be prepared for increased gyrations in asset prices and heightened uncertainties for a length of time.

❝We expect market to correct or remain flattish in second half of FY18❞
- PVK Mohan, Head Equities , Principal PNB Asset Management Company

What can you make of the recent market correction? Have markets corrected enough? 

Against the backdrop of the challenging geopolitical situation, Q1FY18 results, which were slightly below expectations, and valuations above the long term trend, we believe the Indian markets could correct a little more. 

What are the challenges faced by fund manager to beat the benchmark index? How confident are you in beating the benchmark indices in coming years? 

It is difficult to predict future performance, but our funds have consistently beaten their benchmarks over the last several years and it is our endeavour to do so in future too. The key challenge in beating the benchmark index in the current market scenario is due to the fact that stocks have been correcting but the index has not fallen correspondingly; each time different stock/sector helps curtail the downside in index and it is difficult to keep changing the portfolio frequently in tune with the short term market trends 

What is your outlook on earnings in coming quarters and how would you view the Q1FY18 results in particular? Any scope for earnings upgrade? 

As highlighted earlier, the results for Q1FY18 were tepid and slightly lower than expectations in part due to uncertainty ahead of GST. We expect the results in subsequent quarters to improve, more so in the second half of FY18 which would be aided by demand pick-up and low base of H2FY17. The prospects of earnings upgrade is expected be better in the second half of FY18 

What kind of returns can one expect by investing in equity diversified mutual fund over three to five years? 

We believe returns from equity markets could be around low teens over the next 3-5 years 

In which sectors do you see value in markets? 

We continue to believe that there are greater opportunities in the domesticoriented sectors and selective opportunities in the export-oriented/ global sectors. Some of these include sectors such as auto/auto ancillaries, cement, finance and construction. 

The first half of this year was good for equity markets. Will second half mimic first half's performance? What are the key factors to watch out for in the second half? 

It would be difficult to replicate the performance of H1CY18 in the second half. We expect the market to correct or probably remain flattish for the second half, although there could be periodic bursts of rallies and corrections. The key factors to watch out for would be demand environment post-GST implementation, geopolitical environment, results for the remainder of FY18 and interest rate outlook globally and locally.

CONCLUSION:- 

Mutual Fund investing is not as simple as one may like to believe. Like in any game, one needs to have a clear strategy and focus in the 'game' of mutual fund investing. Indian mutual fund industry is maturing at a good pace and the retail investors are preferring to opt for SIP route for equity market participation. While the equity culture in India is still at its nascent stage and there seems to be appetite for small-cap and mid-cap funds amongst the investors, the large-cap funds still remain the ones with highest AUMs. 

Mutual funds investors carry certain myths on investing and it is important that an investor does not fall prey to myths that float around in the market as succumbing to wrong notions on mutual fund investing can be hazardous to financial health. Investors need to adhere to the best mutual fund investing practices as much as possible for optimum results. One of the key aspects of successful investing is keeping realistic return expectations, especially in the current environment where the markets are richly priced. Any market correction should be used as an opportunity to buy more, that is exactly what SIP investment does. Keep your shopping list ready when that happens. 

We have included top seven equity open-ended mutual funds that we believe will create good amount of wealth for investors in years to come. Do consider them! 

Contrary to basing the ranking on historical performance we have looked at individual holdings of each of the equity oriented funds and evaluated the prospective returns of individual stocks held in the fund. Once we estimate how the individual stocks in the fund holdings is expected to perform we have a better view on which fund is likely to outsmart its peers. Based on such unique methodology we have identified top seven mutual fund schemes which we believe look most promising of the lot at the moment.