Should SEBI's advisory directing AMCs to moderate flows into mid- and small-cap funds worry small-cap investors?
Complete Circle Wealth Solutions' Kshitiz Mahajan and Plan Ahead Wealth Advisors' Vishal Dhawan share views.
Complete Circle Wealth Solutions' Kshitiz Mahajan and Plan Ahead Wealth Advisors' Vishal Dhawan share views.
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TVTranscript
00:00 (upbeat music)
00:02 - Hello, welcome to the Mutual Fund Show.
00:10 This is the show where we talk about
00:13 the key mutual fund queries that might be
00:15 in the minds of investors and try and give them answers
00:18 around their mutual fund investing strategy.
00:21 I'm Neeraj Shah, and today on the show,
00:23 we're going to be talking about two key things.
00:27 First, small cap funds have seen quite the rally
00:30 over the last 12 months.
00:32 But whether the recent cautionary tales are an issue
00:37 for some of the more popular small cap funds.
00:40 We've spoken at length about the SEBI warning,
00:42 but more importantly, there were some small cap funds
00:45 which had very large inflows into them,
00:48 namely Quant Small Cap, Nippon India Small Cap,
00:50 and HDFC Small Cap, cumulatively collecting
00:53 about 17,000 crores between them in 2023.
00:57 Should investors in these funds be worried?
00:59 That's the first question that we ask on the show.
01:01 Second question that we ask on the show to our guests today
01:04 is around Axis funds.
01:05 Now, when you look at some of the funds
01:08 which had the largest form of outflows in 2023,
01:12 Axis Blue Chip and Axis Focus 25
01:15 fill that list in the top 10.
01:18 Could redemption-led pressures impact
01:22 the fundamental performance of these funds going ahead?
01:25 I think that's a question that we pose to our guests as well.
01:28 And our guests on the show are Shittiz Mahajan,
01:31 Managing Partner and CEO of Complete Circle Wealth,
01:34 as well as Vishal Dhawan,
01:35 CEO of Plan Ahead Wealth Advisors.
01:37 Gentlemen, both of you, thanks so much
01:39 for taking the time out and being with us on the show.
01:41 I'm gonna start off with the first topic.
01:42 We'll also have some queries
01:44 that our viewers would have posted, which will come to you.
01:47 But, Shittiz, let's start with you on this one.
01:52 Quant Nippon HDFC Small Cap.
01:55 Plethora of money collected by these funds
01:57 to the already existing AUMs
01:59 that they may have had in 2023.
02:01 So the sums of money that they manage anyway is high.
02:05 We're starting to see some bit of flatlining of performance
02:08 for small caps by and large in 2024 thus far.
02:12 Add to that the SEBI warning around small cap performance
02:16 and redemption-led issues.
02:18 Should investors in these funds be worried or no?
02:22 - Well, Gaurav and Neeraj,
02:25 I think very apt topic which you have picked.
02:28 In fact, before actually jumping onto the numbers,
02:32 I was actually going through little past what has happened
02:35 and just to make things simpler,
02:36 why SEBI has done what it has done.
02:39 We have seen in past also,
02:41 and thanks to you only we have covered this topic
02:44 that most of the clients,
02:45 they look at the past performance
02:46 before getting into the new investment which they do.
02:49 Let's go back in 2017 where you have a bull run
02:53 on small and mid-cap and small cap index was up 57%,
02:57 mid-cap index was up 48% in calendar years.
02:59 Most of the investors new to market
03:02 has started coming in 2018 Jan,
03:04 and they just saw the type of return
03:05 in last couple of years these category have produced
03:08 and we have seen a lot of money coming in.
03:10 And again, they had the worst of their year in 2018
03:14 when reputation changes happened.
03:16 And obviously, when you have a performance
03:19 which is leading the earnings,
03:22 you have that correction of or re-rating happening
03:25 on a downside on all these stocks.
03:27 And that's what happened in 2018,
03:28 '19 and we have seen three years
03:29 of long period of fall performance.
03:31 And that's one problem with SEBI is now watching again,
03:35 the type of flows, what we have seen in markets,
03:38 they just want to protect interest of retained investor.
03:41 And there is no major platform,
03:43 I think much more and more platform should come,
03:45 which should talk about the future expected earning part
03:48 also of the funds rather than just posting
03:50 what is the past performance.
03:52 I think that is something which is making
03:53 little seem little scary.
03:56 Just to share the numbers,
03:58 we have almost 11 and a half crore portfolios,
04:00 out of which 1.75 crore portfolios
04:03 are around in small care fund, which is 15% plus,
04:06 and which is on a higher side.
04:08 In fact, in January, just to,
04:09 it's a very good month for Demat as well as,
04:13 you know, mutual portfolios account open.
04:15 Total mutual fund for is open was around 47 lakh
04:17 out of which active funds are,
04:20 that's open ended funds for is around 35 lakh.
04:22 Out of which 10 lakh around 9.75 lakh
04:25 open in the month of January only in small cap.
04:28 So all this money, which is coming now at the peak
04:31 is just coming on the basis of the performance,
04:33 what we have seen in the last two, three years.
04:35 And that is making things a little riskier for clients,
04:39 because they're just looking at,
04:41 and you'll be surprised 28%,
04:44 28% of the new folios are opening in small cap,
04:47 almost 18% opening in big cap.
04:49 So this is just not on the asset allocation basis,
04:52 this is just chasing the term.
04:53 And this is a little riskier and scary part,
04:57 because you know that, you know,
05:00 collection happen and normally just fraud
05:02 will settle down and then many of these investors
05:05 will find it difficult to come back to the market again.
05:07 So I think this is one of the reason
05:09 that regulator has taken a stance that
05:11 and bought the new regulation.
05:14 - Yeah, but specifically for these funds, Shruthi,
05:16 just wondering, is there a case for a worry?
05:18 - My only suggestion to people who are looking at these funds
05:22 who are investing with these funds,
05:23 if they don't require a fund for next seven years or so,
05:26 they just stay invested.
05:28 People who are coming in with a new money,
05:30 which they want to put just do six month weekly STP.
05:34 Normally we suggest 12 to 14 weeks,
05:36 but I think these are markets and in this gap,
05:39 you should look at doing six months weekly STP.
05:42 There's no need to worry,
05:45 but if you need your funds,
05:47 let's say in one year or two years time,
05:48 then you should book some profit off of table
05:51 and past funds and maybe balance advantage fund
05:55 or maybe a fund which are more large cap ish oriented.
05:58 That's what you can look at.
05:59 In fact, many of the people don't realize,
06:01 but when they are actually buying a large cap
06:04 or a multi cap fund also,
06:05 they're getting exposure to a small and big cap.
06:07 So it's not that it's investing in only large cap side.
06:10 So I think if you don't require your funds
06:12 for next five, seven years, no need to worry,
06:15 but don't look at doing lump sum investment at these levels.
06:18 It looks very lucrative in terms of past performance,
06:20 but your performance is what is going to come in future.
06:24 - Got it.
06:24 Now, again, I want to bring this topic
06:27 because while we've spoken about small cap funds,
06:30 the large inflows in some of the funds
06:32 and the large interest that investors have shown in 2023
06:36 into some of these small cap funds
06:39 is also something that we want to bring out.
06:41 Now, and Vishal, I'll come to you on that as well.
06:44 Thanks for joining in on the show.
06:46 What about any of these three
06:49 or maybe one or two other funds
06:50 in which there has been a large inflow of money done?
06:55 AUMs being high, maybe performance on such a high AUM
07:01 could become an issue plus this warning.
07:03 So is your view different from Sheth's?
07:05 Wherein should investors on these funds specifically
07:09 be worried due to the performance
07:10 or due to the kind of flows that the funds have seen?
07:13 - So just said, I think there are a couple of things
07:20 additional that I'd like to add on.
07:22 One is that we need to remember that,
07:24 you know, these funds are, these specific schemes,
07:27 Quant, Nippon, HTFC,
07:30 are slightly differently managed from each other.
07:33 So if you look at the constructs of the specific schemes,
07:36 you will find that Quant, for example,
07:38 has a very high portfolio turnover style.
07:43 So they keep getting in and out of stocks
07:46 depending on where they see the opportunity.
07:47 So for example, if you look at their portfolio right now,
07:50 they have in excess of 20% of their portfolio
07:52 in large companies.
07:54 And one particular group makes up a very large portion
07:57 of that 21%.
08:00 In contrast, you might see that Nippon
08:03 is already allowing money to come in
08:06 only through SIPs and STPs,
08:08 but not allowing the money to come in through a lump sum.
08:11 And they've had this in place for a while,
08:14 in a way trying to moderate flows coming in
08:17 so that they can manage what they have.
08:20 Remember that Nippon already has more than 200 stocks
08:23 in their portfolio, which means that
08:25 how they're managing their fund size,
08:27 which is 46,000 crores roughly of AUM,
08:31 is to try to diversify across many, many stocks
08:35 to manage this.
08:36 And in contrast, if you look at something like HTFC,
08:39 they sort of combine a little bit of a cash position
08:44 by having 10% cash holdings in their portfolio
08:47 with trying to sort of moderately manage
08:53 turnover as well,
08:54 somewhere between what Nippon does and what Quant does.
08:57 So what you can see is there are three different styles
09:00 at play in these three different small caps
09:02 in the way that they're trying to manage this risk.
09:05 Very clearly, whenever small caps do very well,
09:08 which is what we've seen historically,
09:11 they can either be a sharp price correction
09:13 that we saw in 2017, '18,
09:16 or they can be a time correction, which is very long.
09:18 So if you go back in history and look at data,
09:21 you could find that there are periods
09:23 where even for between five and seven years,
09:27 investors have made no money on small caps
09:30 because the returns got front-ended to investors
09:34 and investors who are chasing the past data
09:36 could find that they are now in for a long period
09:39 of either flat returns or negative returns.
09:42 So clearly, I think there's, besides the SIP/STP route,
09:46 we are suggesting to investors to do two or three things
09:49 with small caps.
09:50 One is ensure that you cap your overall exposure
09:53 to 10% to small cap stocks.
09:57 Number two is have an investment horizon of 10 years.
09:59 We think in this environment, even five to seven years,
10:03 which normally is a decent investment horizon to look at,
10:07 may not be good enough.
10:09 And third is look at the style that is most suited
10:14 to you as a small cap investor.
10:15 So if you believe that there is a fund
10:18 that you wanna engage with, which is active,
10:21 which churns portfolios aggressively,
10:24 then choose the fund of that type,
10:26 but be aware that each of these styles
10:27 has their own advantages and limitations.
10:31 So I think that's the way that we are trying
10:33 to approach small cap investing at this point,
10:35 especially with these three schemes.
10:36 - Okay.
10:39 We've spoken about the three small cap funds
10:41 which saw the max inflows in 2023.
10:45 Now we're going to talk about two funds
10:49 which have seen significant outflows
10:51 to an extent the performance has also,
10:54 relative to some of the other funds, not been as great.
10:58 Now, the other funds from Axis,
11:02 and if you just look at the performance,
11:04 the graphics will come up on your screen
11:06 for Axis Blue Chip being one of the ones
11:08 and Axis Focus 25, you will see that the outflows
11:12 from the fund for 2023 were fairly large as well.
11:16 Vishal, I'd like to start off with you on this one.
11:18 Axis Blue Chip, Axis Focus 25, significant outflows,
11:23 that they are not small cap funds,
11:25 by the way, I think the graphic has an error,
11:27 but effectively they are funds from which the outflows
11:29 were to the tune of 7,400 crores and about 4,000 crores.
11:33 Vishal, there are some people who've sent in questions
11:37 around what should they do,
11:37 and we'll get one of the queries as well.
11:39 But my larger question is this.
11:41 If funds see significant redemptions,
11:46 it may impact the fundamental performance as well
11:49 if there is a dearth of inflows,
11:51 simply because the fund house may be forced
11:53 to maybe sell some of the wares or some of the goods
11:56 that it doesn't want to.
11:57 Now, my question with regards to these two funds
11:59 is for people who are invested in these funds still,
12:02 should they stay invested or should they switch?
12:07 - So I think it's a great question
12:10 because what happens is you need to break this
12:12 into maybe three segments and three elements.
12:15 One is to sort of understand what has Axis gone through
12:19 over the last few years, right?
12:21 So they've had two sort of big things
12:24 that they've had to deal with.
12:26 One is Axis Blue Chip and Axis Focus 25
12:30 had some very spectacular performances
12:33 till a few years ago.
12:35 And therefore, a lot of money came in
12:38 on the back of that very strong past performance
12:41 that had happened.
12:42 Not all of the investors who came in at that point
12:46 fully understood what was the investing style
12:49 that Axis Blue Chip and Axis Focus 25 brought to the table.
12:53 The second thing that happened is that there was
12:56 a front running episode that Axis had to deal with,
13:01 which created some uncertainty in terms of how exactly
13:04 they were gonna get impacted
13:07 and whether investors were also negatively impacted
13:10 as a result of that.
13:11 And clearly, sometimes flow of information
13:15 can be in the form of Chinese whispers.
13:17 The third is now the outflows that they are dealing with,
13:22 which has been significant.
13:24 All of these items are actually very strongly correlated.
13:27 So the starting point of this is that Axis Blue Chip
13:30 and Axis Focus 25 have always followed a growth style
13:33 of investing, both of them.
13:35 And what happens is growth styles of investing do well,
13:40 typically when interest rates are low.
13:43 And therefore, they had a very strong performance
13:46 for a few years when interest rates were low globally,
13:49 as well as in India.
13:50 Now, as interest rates started to move up,
13:53 the growth style of investing itself starts
13:55 to get impacted.
13:56 And as a result of that impact,
13:59 you automatically start to see lower performance.
14:02 Now, if this combines with the stress that got created
14:06 by the front-running episode, which we believe
14:09 was probably a bad thing to have happened,
14:14 but may not have impacted investors per se,
14:16 I think you suddenly started to see this combined together
14:21 to create the outflows.
14:22 Now, the outflows in our view matter a lot
14:25 when you run portfolios which are mid-cap
14:27 and small-cap oriented.
14:28 If you look at both these funds,
14:31 the exposure to large caps are 80% and 96% respectively,
14:34 which means that this underlying stocks that they hold
14:37 are very liquid already.
14:39 And because they are very liquid already,
14:42 you get the ability to not have to worry too much
14:46 about the outflows,
14:48 and you can still manage the portfolio
14:50 because you can keep bearing down your positions
14:53 in a certain way.
14:54 So I think the way to think about this is,
14:55 yes, they've gone through a bad patch.
14:59 Lots of it is coming from the style that they follow,
15:01 which is growth oriented.
15:02 In fact, Focus 25 also focuses on quality.
15:06 Quality as a sort of factor
15:09 has not been the greatest performing factor.
15:10 So I think the way investors need to look at it,
15:13 step back, look at their entire portfolio,
15:15 see how much of growth-style funds
15:17 they have in their portfolio, how much value.
15:19 If they have too much growth-style,
15:21 then maybe they wanna do an exit
15:23 because three-year, one-year, five-year performance trailing
15:28 is now impacted.
15:29 Only five-year rolling returns look healthy.
15:31 Everything else is impacted.
15:33 But if they're underweight on growth as a style,
15:36 I don't think they need to go out there and panic and say,
15:38 we need to change our portfolio
15:40 because we are seeing access underperform.
15:42 - Got it.
15:43 So Psheti, that point is well taken,
15:45 but from a performance perspective as well,
15:48 because they've had some performance issues
15:50 in the past three years, should people stay here?
15:53 So Vishal's point is well taken.
15:54 Let the redemption not be the reason for that.
15:56 Is performance the reason for that
15:58 or even that's a thing of the past?
16:00 - So I broadly agree with what Vishal is saying.
16:05 I think they've lost their,
16:06 the third even, which is their,
16:09 just to add to what Vishal is saying,
16:10 they lost their CIO also.
16:12 So there's a lot of things.
16:13 In fact, Jalresh, who was a CEO,
16:15 was himself a fund manager at one point in time.
16:17 So the core team on the fund management side is not there,
16:21 which is a little worrisome.
16:22 But having said that,
16:24 I think they need to rejig the portfolio
16:25 because there are a lot of growth funds otherwise,
16:27 which have done well in the basket.
16:29 It's for that growth.
16:31 And I echo that low interest rate was pushing growth
16:34 and because of high interest rate, it gets impacted.
16:36 But many growth fund have realigned themselves
16:38 and adjusted them well,
16:39 where they are able to come up the curve.
16:42 Here, I think, with regard to the redemption,
16:45 I don't see there is an issue on the performance side,
16:49 but there's a lot of work to be done internally
16:51 by access team on both the fund side.
16:54 And normally you will like to give four, five years
16:55 to a fund, and cycles happen.
16:58 Right now, it's like access funds have not done well
17:00 in the past, there was some other AMC.
17:02 And this is a part of a journey
17:04 where my conviction on some of the bets will not play out,
17:07 irrespective of the businesses I put.
17:08 You see the portfolio,
17:10 you will not question about why these companies
17:12 are there in the portfolio.
17:13 But yes, the price is not coming
17:15 as per the names or earnings of the portfolio.
17:18 And that's why it's not affecting in the returns.
17:21 But if you have a lot of growth style in your portfolio,
17:26 then you can still look at shifting within access only,
17:31 some funds, the other funds which are doing well,
17:34 or you can look at moving out.
17:36 So biggest problem of moving out,
17:37 neither just that there's a cost involved of capital gain.
17:40 If you're pretty sure that you are going to go
17:42 with a 10% capital gain also in your next one,
17:45 which you are paying right now to have a better fund,
17:48 and you can outperform the current performance
17:51 after paying that 10% capital gain,
17:53 regaining that 10% capital gain from the new fund,
17:56 then you should move out.
17:57 So sometime equity markets funds, they test our patience.
18:02 There's nothing wrong with the house.
18:03 But I'm saying that you have to take into account
18:07 that capital gain part is also there.
18:09 So give an answer to that.
18:12 - Yeah, point well taken, point well taken.
18:13 Okay, now we have three minutes on the show.
18:15 I'm gonna take queries from each of you.
18:17 We'll do a bit of a rapid fire
18:18 so that you can cover more queries if we can.
18:20 The first query has an access element to it,
18:22 which is I've taken this.
18:23 Raj, age 59 years, who is a gold traveling,
18:26 saying that currently has SIP in three funds,
18:30 ICICI, FlexiCap, Access, Blue Chip, ICICI, and ASDAQ 100.
18:34 The query will come up on your screen next, viewers.
18:36 Can you suggest some high return funds
18:38 apart from the small and mid caps
18:39 as they've already given good rally?
18:41 Vishal, very quickly, under a minute,
18:43 if you can suggest something.
18:45 - So first point, I believe that, you know,
18:49 if your traveling goal is a short-term goal,
18:51 equity is not the right asset class at all.
18:54 - Pertinent, perfect.
18:54 - And therefore, you know,
18:56 if you're looking at something which is
18:58 with a one, two year investment horizon,
19:00 and you insist that you want equity
19:01 and you want it to be tax efficient,
19:03 then at the most you would go to a scheme
19:05 which has, you know, very little equity in it
19:08 to sort of give you a small kicker
19:10 with the risk that comes with equity.
19:12 And therefore you might look at a equity savings fund,
19:15 like maybe the ICICI Prudential Equity Savings Fund.
19:18 It's not a high return fund,
19:19 but you know, you need to map the goal
19:21 to what you're trying to do.
19:22 - Okay, a fair point out there.
19:26 And Shetty, just a quick follow up there.
19:29 You had mentioned that within Axis also,
19:31 there are some funds which are doing well
19:32 if people want to switch out.
19:33 This person has an Axis Blue Chip.
19:35 Would you recommend a switch to any other Axis fund?
19:37 Very quickly.
19:38 - If you want to have a large cap fund only,
19:40 then I don't think that,
19:42 my sense is, next fund is a better option
19:44 with a low expense, rather than just doing Axis
19:47 or any other large cap fund.
19:48 You should go for Nifty 50 or next Nifty 50.
19:50 That's what one can do.
19:51 - Okay, fair point.
19:52 The second query is coming from Noel.
19:54 Well, 22 years, so young investor says,
19:58 can you share your insight on value index funds
20:00 like UTI Nifty 500 Value 50 Index Fund
20:03 or the Motira Loswal Enhanced Value Index Fund?
20:07 Shetty, any thoughts here?
20:08 - Well, Noel, these are smart data funds.
20:11 And just to make it simple,
20:14 they are index fund with a different caveat attached to it,
20:17 wherein they don't replicate the same percentage allocation
20:20 of index fund, but they go with their various parameters
20:23 like dividend yield, price to earning,
20:26 let's say, low churn or many other things
20:29 where stocks are there.
20:30 So they look at these type of parameters
20:32 where you invest through that,
20:33 and they try to beat index by taking the best
20:36 out of the index and participating in that.
20:39 But my sense is, you have active funds
20:41 which are doing so well, and you're very young.
20:44 So I think you should look at a focus
20:46 on multi-cap portfolio for you.
20:49 Otherwise, these are smart data funds
20:50 that both these categories of funds which are there.
20:53 - Okay, I would love to take more queries.
20:55 Noel wants to know about SBI Contra Fund as well,
20:57 but maybe Noel will try and take that question
20:59 on the next episode of the MF Show
21:01 because we're completely out of time here.
21:03 Take a moment to thank both Shetty and Vishal
21:06 for joining us on the show today
21:07 and giving us their insights.
21:08 And by the way, as we wrap up the MF Show,
21:11 the news flashes on your screen about the IT minister
21:13 saying that Google has agreed to list all the apps
21:15 as on status, which was there on March 1st,
21:18 would mean that some of the stocks,
21:20 like InfoEdge and some of the others,
21:21 might be active in the session.
21:23 I'm sure the next show will take forward all of those.
21:26 Thanks so much for tuning in
21:28 to this leg of the Mutual Fund Show.
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