Spotlight On NFOs This Week
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00:00Hello and welcome to the Mutual Fund Show. I am Neeraj Sharma. Over the next 22-23 minutes
00:11we will talk all about mutual funds obviously, but various aspects of mutual funds especially
00:17in a period right now wherein both IPOs and NFOs are very, very active and available in
00:27abundance. So I think with that as a preamble, let me welcome my set of guests on the show
00:34today. Saloni Sanghvi, founder of My Wealth Guide to kick start the show today. Saloni,
00:40great having you. Thanks as always for joining in and for taking the time out.
00:45Thank you so much for having me on the show, Neeraj.
00:47Okay. Saloni, I'm throwing this out of the dark at you because while there are some topics
00:52that I really want to talk about, the fact remains that NFOs are available and quite
00:59a number of NFOs out there. So on last count that we figured out, in the month of August
01:03itself, Franklin Ultra Short Duration, Aditya Birla Sun Life Defense Index Fund, Bandhan
01:09Nifty Bank Index Fund, BOI Business Cycle Fund, DSP Nifty Top 10 Equal Weight Fund and
01:15if I leave out DSP Top 10 Equal Weight Fund, a bunch of others are out there. I would love
01:20to know, Saloni, because the principal belief that I've heard from you and some of your
01:26peers is that NFOs may not necessarily be the best place to invest in because you'd
01:30rather wait for the fund to perform and then go in. But out of the spate of NFOs open right
01:36now, is there something that has caught your eye?
01:40I think, yeah, again, I concur with the same, you know, that for most people, I think NFOs
01:45is not something they really need to invest because in most segments, we already have
01:50funds, which have been there for the last 5, 10, 15 years. So you know exactly how the
01:55fund is going to behave during different market cycles. I think the only time that you can
02:01really or you should really look at an NFO is, you know, if it's offering something new,
02:06either a new segment or a new strategy, which is not currently there in the market. So I
02:13think right now, I would not really look at any of the NFOs that are currently there
02:19in the market.
02:20A clutch of business cycle NFOs out there, Saloni. Any thoughts here? Because, I mean,
02:26is it a fancy name for something that a Flexicap or a Multicap fund would anyways do?
02:31So again, I think for most people, you know, a Large Cap, Flexicap or a Mid and Small could
02:39work depending on their, you know, allocation. Again, I think this is a very specific thematic
02:46fund not suitable for most investors.
02:49Okay, fair call. Well, since you're on the topic of NFOs, let me, and as I welcome in
02:55our second guest on the show today, we'll start off with the NFO conversation because
03:00there is an NFO from the DSP stable as well. Kalpain Parekh, MD and CEO of DSP Mutual Fund,
03:05with us on the show too. Kalpain, great having you. Thanks for joining in. A full disclaimer
03:09Kalpain, Saloni, and for all the right reasons, has said that NFOs should be approached cautiously
03:15and she believes that a fund which has established its performance over a period of six, nine
03:20months should be the ones to invest in.
03:22I want to start off with you on the NFO since we had started off with that topic because
03:25your house is coming out with this nifty top 10 equal weight index fund. So if we can,
03:31let's start off with that and talk about why is it that you've thought of this offering,
03:35Kalpain?
03:36Thanks for welcoming me, Eeraj. As always, pleasure to be on your show. And I briefly
03:43was hearing your conversation silently with Saloni and I think I agree with what she says
03:48that at the end of the day, as an investor, we need very few portfolios for our long-term
03:54investing journey. And if every month there are 20 new products in the market, partly
03:59it is to fulfill our objectives and not necessarily your objectives. So every NFO has to be seen
04:05with the question that is it changing anything in my portfolio? Either is it helping me improve
04:10the return outcomes, return probabilities, or is it helping me in reducing the risk of
04:15my portfolio? Only then, one should evaluate whether you want to look at any new idea or
04:21not, because NFOs don't have track records, NFOs don't have live money being deployed.
04:25So that is the first disclaimer. And we completely recognize that. At the same time, if you have
04:32noticed over the last many years, the approach that we have brought to designing a product
04:38or launching a product in the market is to launch a product when past returns are poor
04:44because the big rule of investing is mean reversion. The iron law of investing markets
04:49is mean reversion of cycles. So generally we prefer to bring to the market products
04:57which are in low cycle or strategies which are in low cycle, which are simple and which
05:02can make some meaningful contribution either in terms of rewards or reducing of risk in
05:07the portfolio. Why particularly Nifty top 10 equilibrium today? In India, I'll just
05:13give you some statistics. The largest 10 stocks, they are roughly around 23-24% ROE versus
05:1815% of Nifty 500. And these 10 stocks, because of the last four years of depolarization where
05:26a lot of money has been made in stocks away from stock 1-10, whether it is stock no. 11-50,
05:3550-250, 250-500, 500 and beyond. Most of the money has been made on the other side of the
05:41market. In the last one year alone, the top 10 stocks have delivered 17% return and stock
05:47no. 11-500 have earned 51% return. So in the long term, these top 10 stocks, whatever they
05:57may be at different points in time, they are dominant companies, they are mega caps, they
06:01are the largest caps of the country, they represent some of the best businesses of the
06:04country and they have delivered value over time. So if you see very long term returns,
06:08generally the top 10 stocks have delivered superior returns over Nifty or Nifty 500 with
06:14relatively better risk profile. And today we are launching them when they are in low cycle.
06:19We are happy to launch funds when they are in low cycle. Otherwise, in fact, you were discussing
06:25about NFOs, the construct at DSP is to launch OFOs. We have been constantly launching old fund
06:30offers. So in 2020, we launched the old fund offer of our Flexicap fund, which had a 23-year
06:37history at that point in time. In 2021, we did an old fund offer of our Tiger fund, which is very
06:43popular today because last 4 years, the returns have been stellar. So our whole idea is to launch
06:48this fund because it is in low cycle. The whole market is allocating unnecessarily, probably
06:54unduly higher capital towards small cap stocks, mid cap stocks, not even small and mid cap funds.
07:00We are collecting only 2000 crores, but small cap stocks are taking away a lot of investors'
07:05safe capital. And we believe it is better to be in this pocket at this point in time from a risk
07:10industry to get out of this sector.
07:41Again, Saloni, your view around why NFOs should be avoided is par for the course. I am just trying
07:46to understand in this specific case, as an asset class, could large caps and an equal weight index
07:51do well relative to mid caps and small caps? As you rightly mentioned, I think in the last
07:586 years, mid cap and small cap has attracted a lot of attention and investment due to the returns
08:04in those segments. In fact, the AUM of mid cap mutual funds, I think currently is even higher
08:10than that of large cap. And valuations have of course run up, so there is a lot of concern around
08:17overvaluation and froth in the market. I think as of March 31st, the PE of Nifty 50 was 22.9,
08:27whereas the same for Nifty small cap 250 was 26.6 and for mid cap was 33.6. So, this divergence has
08:38definitely increased the attractiveness of large cap and also increased the margin of safety.
08:44Larger companies are stronger fundamentally and far more resilient during any economic
08:50uncertainties, in some of which we have seen lately, like inflation, geopolitical tensions,
08:57interest rates, etc. That being said, I think we will be seeing a lot of FII flows also in India
09:05and future. Traditionally, this has been in the large cap segment, but in the last few years,
09:10they've also made large investments in the mid and small cap. So, should one redeem and invest
09:17in mid and small cap and invest in large cap? I think it's important to stick to your asset
09:23allocation based on your risk-taking ability and time to goal. Only redeem if your portfolio
09:29has become heavily skewed towards mid and small caps and you need to rebalance. I think if we come
09:36to the current NFO that is there, it's basically a smart beta strategy which combines the benefit
09:45of active and passive investing. And because it is based on an index, it's easily back-tested to
09:52see how it performs during different market cycles. So, in this NFO, of course, we have some
09:58amount of that background as well. And an equal weighted index, of course, are better than a
10:04market-weighted index during a broader rally when especially smaller stocks actually perform well.
10:11So, I feel this, obviously, being a very concentrated strategy, within the large
10:17cap allocation, maybe one can look at a 15% to 20% allocation to such a strategy. But I would
10:24only recommend this strategy to those investors who are knowledgeable and understand how
10:30various factors work and how this would work in various market conditions and, of course,
10:35have a higher risk tolerance. Got it. Point well taken, Saloni. Thanks for that really
10:41lovely explanation. Now, Kalpen, in the other aspect, you mentioned that you are launching
10:47or you would think of launching an NFO in pockets which have underperformed maybe at times because
10:54reversion to mean is that iron mantra for the markets. I was looking at some statistics from
10:59one of your newsletters which said that over the last six years, large cap active funds have
11:04received less than one out of the 10 rupees of net inflows into active funds. So, is that the
11:09other reason? I mean, there is a bit of not shunning really, but a big preference towards
11:15mid caps and small caps. And therefore, large caps may have fallen out of favor. And at some
11:21point of time, by virtue of fundamental performance as well as money flows put together,
11:25large caps may actually gain prominence in portfolios over the course of the next two,
11:30three years. I think you said it, Neeraj. And another important point is people are not
11:38investing in small and mid caps because they want to invest in small and mid caps. They are
11:41investing in small and mid caps because the past performance has been significantly superior
11:46in the last few years, especially post COVID lows or even since 2013. Now, remember,
11:532013 till today, if small and mid caps have earned around 20% return, it was also because 2008 to
12:002013, the small cap index or the mid cap index had given zero to negative returns. So, the past
12:06setup is very important to determine what the future returns would be. And clearly in the last
12:11five years, partly operating performance of small and mid cap companies have improved. And other
12:16part is more flows chasing companies with relatively less free flow, which is why the valuations have
12:22started showing a premium to large caps versus typically always in the history of our markets,
12:27small caps have been at a discount. We are also operating in a very different template compared
12:31to the rest of the world. In the rest of the world, the small and mid caps are far cheaper.
12:34They are closer to 10, 12, 13 times price to earning. In India, they are in the range of 30 to
12:4035. So, my perspective is always never do market cap based investing. Buy good companies at good
12:47prices. It so happens that because of our nuances in the last five years, retail money has allocated
12:54more capital to small and mid caps and relatively large institutional money or FII money has moved
13:01out of large caps because a lot of FIIs have been moving out of India in the last four years.
13:05A lot of selling has happened, especially in banking stocks. So, that's where it is presenting
13:10a tactical dichotomy or a tactical opportunity where large caps are, I won't say they are cheap
13:16because nothing is cheap, 22, 23 times nothing is cheap. Long-term averages of our markets are 16,
13:2217. So, we are definitely at a premium to our past history. We are at a premium to every other
13:27market in the world, partly deserving, partly fraught in terms of flows. But we feel comfortable
13:34to say that relatively the large cap universe, whether actively managed or through passive funds
13:41is an area where we should not reduce our rates, we should only increase our rates.
13:47Second point I would clarify is instead of buying small and mid cap stocks without knowing the
13:52fundamentals or the quality of those businesses, if at all you want to be in that bucket, come
13:56via small cap funds, via active small cap funds, because this is a statistic we had presented
14:01sometime back that 85% of small cap companies in the index are poor companies, their ROEs are
14:06closer to single digit, they are not necessarily the best of businesses. So, it's better to invest
14:11in small caps only through funds and not buy them directly. Last point, 2008 till today,
14:1816 years have crossed, the return on the small cap index, which is the combination of all small
14:24cap stocks which are available in the market is single digit, in spite of today's premium or
14:31sharp rises. So, you can have prolonged periods of underperformance if you are in bad small cap
14:35companies. And the only way to solve for that is not to be in bad small cap companies, either via
14:40active small cap funds or by increasing your weights in large or flexi-cap sort of portfolios.
14:47Okay, well, we need to slip into a break though on this note. Actually, Saloni, just before we
14:53take that break, very quickly, quick 30-second view, Saloni. I heard you say that people should
14:58swap into an NFO or any large cap fund only if under certain conditions, but for new investors,
15:04Saloni, would a large cap fund be preferred at the current point of time versus a mid cap or
15:08a small cap fund or not necessarily so? So, I think that a lot of it would depend on how much
15:15risk they're comfortable taking and what is the duration they want to remain invested in.
15:20So, for anyone who's looking at maybe a five-year period, then I think only large cap and flexi-cap
15:25or regardless of the risk profile would be a segment to look at in the equity allocation.
15:31For anyone who's looking at five to seven years or can add a little bit of a mid cap.
15:37And for anyone who's looking at a holding period of more than seven to eight years
15:42and is aggressive in terms of the risk they're comfortable taking, then they can add small cap
15:49and maybe international funds as well. So, I think a lot of it would depend on how comfortable you
15:53are with various levels of risk and what is the time that you have to invest and keep those funds
16:00invested. Kalpen, I don't know if the thought process at the DSP equity team is slightly
16:06different, but the few investor conferences that we've attended in the recent past seems to suggest
16:11that industrials and the CapEx theme is the one to bet on in India over the course of the next
16:17five, six years with private CapEx hopefully set to take up the baton after public CapEx or the
16:24government CapEx has been very strong. Now, if you agree with this Kalpen, how is it that an average
16:31mutual fund investor tries to make most of this? Any thoughts here? So, I don't want to get into
16:38whether we are different or not. What is important is we are correct and as long as we are not
16:43correct, nothing matters to the investor. So, on this particular concept of private CapEx or
16:50industrials, it's not to the way that we're talking about it. We relaunched our Tiger Fund in January
16:562021, almost three and a half years back as an old fund offer. We brought it back to the market with
17:03a lot of fanfare, but the prior five or 10-year returns were looking so mediocre compared to
17:10all the other hot themes at that point in time that we really did not get investor interest or
17:15market interest. And this fund in the last four years has given reasonably superlative returns,
17:20including last one year. The whole team has given, not just this fund. So, all other funds in the
17:24same space have done very well. We agree with the fact that private CapEx should happen and we are
17:32seeing a gradual improvement in those numbers. But the question to ask is, are valuations not
17:38aware of it? Is the market not aware of it? And if the whole market is aware of it, is it priced in
17:43or not? So, clearly, we recognize that this is a great space for companies, for investors in India
17:51to be in. But a lot of these companies have crossed 40, 50, 60, 70, 80 multiples. So, a lot of good
17:58news is also getting priced in. And which is why if investors have to participate in themes like
18:03this, they need to be with an agile, active fund manager who also respects valuation. The biggest
18:09accidents in years have happened when we buy a team without asking questions of risk management.
18:15The same thing was very popular in 2008, where all narratives in all type of conferences were
18:21that India will become like China. So, go and buy infrastructure funds. From 2008 till 2020,
18:27these funds, or even from 2008 till today, the category has earned less than savings account
18:32returns. So, the second dimension to always ask is that, are you going to participate in this
18:37theme with all the guardrails of right valuations and not blindly jump into this theme? So,
18:43just to give an example, in our Tiger Fund, we picked up defense stocks four years back,
18:48even before geopolitical situation in the world started getting volatile. And some of these
18:54stocks were at single-digit PE. Today, they are at 40-45 PE. So, our weights from 20% have come
18:59down to 6-7%. So, we are being very active in this pocket. And we've been also encouraging
19:03investors to do long-term SIPs from where we are today. Three years back, we encouraged aggressive,
19:09lonesome participation in this theme. We continue to be positive in terms of growth prospects and
19:14revenue growth prospects. But valuations are something that are a bit concerning,
19:20and you need to be conscious of that as an investor.
19:25Okay, Kalpen, we will leave it at that. Thank you so much for taking the time out and being
19:29with us today on the Mutual Fund Show and giving us your thoughts. Really appreciate your time.
19:34All right. That's the view from Kalpen Parekh of DSP. Saloni, same question to you really.
19:39Do you believe that the CapEx theme will create wealth? And if so,
19:46is there a mutual fund route to play this?
19:50So, industrials are highly correlated to economic growth or delivering high returns when the economy
19:56does well and performing poorly if the economy doesn't do as well. Timing is definitely important
20:02when investing in this sector. We have the government's goal of making India 10 trillion
20:08economy by 2030. So, I definitely think that we're on a cusp of a large CapEx cycle. Without that
20:15CapEx, we would not be able to see and reach that kind of growth. Currently, the CapEx,
20:21of course, and as Kalpen mentioned and you mentioned as well, CapEx has primarily been
20:26driven by government spending. Once the private CapEx kicks in, that will be a huge added tailwind
20:33as well. So, one way of getting exposure and investing in this theme is via infrastructure
20:41funds. There are currently around 19 funds within AUM of almost 52,000 crores. Of course,
20:49most large and flexi-cap funds have an exposure of around 10 to 12 percent. But for people who
20:57want an added exposure to the segment, they can definitely look at these infrastructure funds.
21:03Just, I think one thing that people have to keep in mind is that these are far more volatile
21:09because it's a thematic fund. So, this would form a part of a satellite portfolio and not
21:14part of the core portfolio. I think a couple of funds in the sector which have a high allocation
21:21to industrial specifically in the infrastructure segment and have performed well over a longer
21:29period of time is Invesco India infrastructure fund and of course, the DSP type of fund.
21:35So, these are some of the funds that people can look at.
21:39Now, a couple of queries Saloni, if you will, because a lot of people want answers to
21:44their specific questions. I would urge you to try and see if you can answer some of these.
21:49I'll try and make it as simple as I can for you. The first query is from Arpita,
21:54who's 55 years of age. Arpita wants to invest 30,000 rupees per month for 48 months as she's
22:01closer to retirement at 55 years. What should be her fund mix?
22:07Right. So, I think it's difficult to recommend the exact right asset allocation without knowing
22:14how comfortable she is with various levels of risk. But since she has around four years to go,
22:22I'm assuming before retirement, I would recommend keeping at least one year expenses in a debt
22:28mutual fund or an FD. Another two years expenses can be invested in a multi-asset or a balanced
22:35advantage category. And the rest of the funds can be invested between maybe two funds from
22:43either one an index fund or a flexicap category. So, that's how I would look at
22:49asset allocation in her case since she is very close to retirement.
22:54Okay. Well, Arpita, I hope you got your answer. But remember, it might be good for you, Arpita,
22:59with the sums that you're talking about to consult a financial advisor because Saloni is right,
23:04without knowing complete details, it's very difficult to give specifics of what the
23:09fund names could be as well. So, I do hope you find a good solid financial advisor to try and
23:15tell you how to go about doing this. It might be a cost that is well worth it. Saloni, the next
23:20question is from Hari. Hari is aged 41 years, investing Rs. 5000 per month in each of the SBI
23:28Nifty 50, Parag Parikh Flexicap and HDFC Mid-Cap Fund. Is Hari going in the right direction for
23:34the next 15 years? Again, without knowing more details, it's hard to comment on the split between
23:41the large and mid-cap segment. But given that Hari has a longer time frame or 15-year horizon,
23:47he can afford to take a little more risk. But prima facie, I think all the three funds are
23:54good funds in their respective segments. So, he can continue investing in those.
23:59Got it. Well, unfortunately, we're out of time completely on this show. But Saloni,
24:03such a pleasure talking to you. Been a while, so good to have you back. Thanks for being on
24:07the show today. Thank you so much, Neeraj. It was great to be on the show.
24:11Thank you. And viewers, thanks for tuning in to this leg of The Mutual Fund Show.