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00:00Hello, welcome to the Mutual Fund Show.
00:09I am Neeraj Shah and over the next 25 minutes, we will talk about one particular aspect of
00:15mutual funds in detail and that is, yes, thematic investing, but thematic investing into pockets
00:20which have been very, very active.
00:22And I think what we have chosen today is defense, because that sector is the cynosure of all
00:29eyes, at least was the cynosure of all eyes until maybe four months ago, has done really
00:35well and I am sure a lot of people have either individual stock holdings or may have exposure
00:41to the mutual fund route into the defense funds or funds which have a higher exposure
00:46to defense as well.
00:47So with the bit of a pause that the sector seems to have taken, is it a good time to
00:55consider investing in a thematic fund which invests into defense or an index fund which
01:00invests into defense per se?
01:02I think the right guy is to talk about this is Prateek Oswal, because he is the head of
01:08passive funds business at Motilal Oswal AMC and they have an index fund and ETF, I believe,
01:14which mirrors the defense index.
01:19Prateek, thank you so much.
01:21Good afternoon for joining in here and thank you so much for joining in here.
01:25How do you guys think about, we'll come to the product, of course, that you have and
01:29how people can use it and why is it good, bad, ugly, but how do you guys at the margin
01:35think about defense, considering that it's a sector that has run really well in the recent
01:40past and is now taking maybe a necessary breather?
01:45Great.
01:46Thanks.
01:47Thanks so much for having me on the show.
01:50Yeah, so I think this is, we believe this is a sort of needed breather for the space.
01:57I think there's been a lot of, you know, I think run up in the space over the last three
02:01to five years time.
02:03And we believe that there's been a lot of investor interest in the space as well.
02:07A lot of investors who are not sure about which stock to buy, which stock to sell, they
02:11do rely on mutual funds to do the asset allocation.
02:15And we believe that mutual funds offer superior diversification because you're invested across
02:20different stocks.
02:21Unfortunately, there's not a lot of defense companies in India currently.
02:26We believe that over the next three to five years time, there'll be a lot more IPOs coming
02:29in the space.
02:30A lot of bigger organizations who are also entering the space, you know, because as you
02:35know, the government has now mandated that in the next, I would say to 2029, they want
02:42close to 90% plus of the defense spending to be happening in-house within our own domestic
02:49companies.
02:50Apart from that, the government also has mandated a huge amount of exports due to happen already.
02:56I think Indian companies do export to 100 plus countries.
03:00So we do believe that this space is going to explode.
03:02There's going to be a lot of companies and a lot of who are coming and buying up for
03:08the huge defense budget.
03:10So we believe that it's a big space.
03:12However, you know, having said that, valuations in this space have been quite premium over
03:17the last four to six months time.
03:19So we believe that the space requires some sort of earnings to catch up for valuations
03:24to sort of stabilize.
03:25And maybe you could see some run up in the stocks again.
03:28Hmm.
03:29Okay.
03:30Pratik, how, so when you guys think about a longer term theme, how do you guys think
03:36about a theme like that?
03:38Because people usually get caught up and maybe rightly so caught up, maybe wrong word into
03:43the current valuations.
03:45And at times people who are constructive on a theme which is expensive, talk about the
03:50really longer term growth tenor and how some of these valuations might look very cheap
03:55or pedestrian at some years out.
03:57So is defense that kind of a theme?
03:59How do you think about that aspect?
04:00Yeah.
04:01So it's a good question.
04:02So, you know, valuations can be seen from two purposes.
04:05Are the valuations expensive because of the company, because of the sector or because
04:10of growth?
04:11We believe that defense as a subsector, which comes under manufacturing as a theme, is actually
04:16going through a huge growth period.
04:18Just for example, over the last two years, we're looking at profitability of these companies
04:22going at 50%, 60%.
04:24Last one year, you're looking at profits going at about 65% of these companies, all of them
04:29to combine them.
04:31So we believe that growth has been a driver of higher valuations in the space.
04:35Having said that, you know, I think if you have high valuations with no growth, that
04:38is when obviously investing can get tricky.
04:41And that's when you can expect valuations to not really catch up with earnings.
04:46We believe as a house that defense over the long term is obviously an excellent theme.
04:53A lot of these stocks that are already there in our defense index fund that we launched
04:57about a few months back are already owned.
05:00So as a house, we're very positive about manufacturing and defense as a theme.
05:03We believe that over the next decade, if you look at India, our primary exports used to
05:08be IT and pharmaceuticals, so healthcare and healthcare, mostly pharma and IT, but manufacturing
05:16can be this third vertical as the world sort of diversifies away from China.
05:21So we believe that under manufacturing, defense can play a big role.
05:25You're already seeing big orders coming in.
05:27I think the risk in defense is not on the order book side, it's more on the execution
05:31side.
05:32Are these companies in this sector able to execute in a timely manner so that they are
05:38able to take these orders and convert them into P&L?
05:42So I think that is something that is to be seen.
05:44So far, they've done a very good job in expanding capabilities production.
05:48So that is a space which we need to look out for.
05:51But yes, I think growth potential is there.
05:53And obviously, because it's a very high tech industry, profit margins also tend to be very
05:57good because you're looking at companies that have to, it's very hard to be a part
06:02of SIDM or Society of Indian Defense Manufacturers.
06:05So I think in that sense, not any company can sort of enter the space.
06:10So barriers to entry are also quite high for the space.
06:12Got it.
06:13Okay.
06:14Pratik, how does one use the options at the Motilal Oswal AMC or the Motilal Oswal AMC
06:21house to invest into this?
06:22Because I believe you have an ETF and an index fund both?
06:26Yes.
06:27So tell us a bit about this.
06:28Yeah, yeah.
06:29Yeah, absolutely.
06:30So we launched two funds over the last few months.
06:34Both are tracking the same index, which is the NIFTY India Defense Index.
06:38It's an index where essentially looking at investing in about 12 to 13 stocks, because
06:43that's the, unfortunately, the only few number of stocks that qualify for this index.
06:48Hopefully, we'll see a lot more going forward.
06:51So you're essentially looking at an index, which is about 13 stocks.
06:56And how does the selection happen?
06:57The stocks basically have to be a part of the SIDM, which is the Society of Indian Defense
07:03Manufacturers.
07:04And about 10% of the revenue of these companies have to come from the defense sector directly.
07:08So that is how the stock selection happens and 13 companies sort of qualify for this.
07:13This is a passively managed fund.
07:14So there is no active stock picking, there is no fund manager who's taking a call about
07:18what stock to buy, what stock to sell.
07:20You're essentially just tracking the NIFTY India Defense Index.
07:24And that's how this sort of index is constructed.
07:27The index is rebalanced about twice a year in March and September.
07:31And there is obviously a maximum stock of 20%.
07:34So no stock can go above 20%, which I think is hygiene, because defense tends to be...
07:38If you look at the current index, it is very large cap and small cap oriented.
07:42So to avoid very high stock concentration, which is not what you want from a mutual fund,
07:50the 20% stock cap.
07:51So it's a very simple index.
07:52It tracks the performance of defense companies.
07:55And it's available in index fund format, which in our experience has been a lot more popular
07:59than ETFs.
08:00The ETF is something that we also launched about a month and a half, two months back.
08:05And that's also an option for investors who prefer ETFs or index funds or just want to
08:12buy the ETF.
08:13So both formats are available.
08:14The return should be pretty much the same.
08:16And the idea is to track companies in the defense space.
08:20Again, just to reiterate, this is a thematic fund.
08:23So we do ask our investors to really look at the long term potential of the sector as
08:28opposed to looking at it from a three to four months perspective, or even a two year perspective
08:32may not be good enough.
08:33As a house is very bullish on this subsector, and all the positive levers are there.
08:39We just obviously think that over the long term, this is one thing where we believe there
08:45could be good wealth creation.
08:46Prateek, how would the number of stocks in this index increase?
08:50Is it a factor of companies becoming a part of that particular society, SIDM or something
08:57that you were talking about?
08:58Or are there other factors to this?
09:00Yeah, so that's the methodology.
09:03So this methodology is decided by NSE indices.
09:07It's a very simple methodology.
09:08It's essentially companies that are part of the SIDM, which is a Society of Indian Defense
09:13Manufacturers.
09:14So that's the group that it has to be a part of.
09:16It has to qualify for that group.
09:17And also, a lot of companies qualify, but their revenues may not be significant.
09:21So the idea here is to ensure that about 10%, at least 10% of the revenues are coming directly
09:27from the defense sector, which makes it quite significant.
09:31So if a company qualifies for these two criterias, then obviously they'll be part of the index.
09:36So currently there are about 12 to 13 companies in this index.
09:39We hope that there'll be a lot more in the future.
09:42And Pratik, one final question, really.
09:44And considering that it's a passive fund, I'm presuming you're not responsible technically
09:51for the performance because it's tracking an index, right?
09:55You can correct me if I'm wrong, unlike an active fund.
09:58But are there some ways, benchmark, expected returns over, let's say, a five-year period
10:04that you envisage that something, that this index, or therefore on the back of that, investors
10:11in this fund can get?
10:12Yeah, no, it's a good question.
10:15So obviously, we are responsible for launching funds.
10:19And we obviously have tons of funds that we could launch.
10:24We believe that the methodology or the decision making of why we launch certain funds is because
10:30we see wealth creation opportunities in them.
10:35So I think this particular index is an index where we see wealth creation.
10:39What does that mean?
10:41So in finance, obviously, if you're taking higher risk by investing in a sector or thematic
10:47fund, you would expect it to obviously come with more volatility, but you also expect
10:52it to give you slightly higher returns than what you would get in, say, a Nifty 50 or
10:56a Nifty 500.
10:57So at least our internal expectation is that over, say, a five to seven-year period, which
11:03is what most investors should do when looking at equity funds, because equity funds tend
11:07to be very...
11:08You need to take a five to seven-year call for equities.
11:11We do expect investors to make some sort of premium over the Nifty over the long term.
11:19Having said that, the problem is that a lot of investors are being swayed by the past
11:24returns.
11:25We have repeatedly said that, obviously, the sector has had a huge run, and valuations
11:30are also very expensive.
11:31So investors should keep in mind that, keep their expectations not as high as what it's
11:36been in the past, which is 40, 50, 60 percent, it's super unlikely that that scenario may
11:42happen.
11:43Obviously, no one knows.
11:44But it's very unlikely from a probability perspective that you will see the same amount
11:48of performance in the future.
11:49That's well said.
11:50And it's always good to hear the manufacturer of a product sound out the bugle of caution
11:56as well.
11:57So Prateek, fairly responsible to do that.
11:59Thanks so much for doing that.
12:01And thanks so much for being a part of The Mutual Fund Show today.
12:03Thanks, Sridhar.
12:04Thanks for having me.
12:07The pleasure was ours.
12:08Well, viewers, there you heard it.
12:09And, you know, it's good to hear a word of caution as well, because a thematic fund,
12:13you need to have that word of caution too.
12:15It's not for everybody, bear that in mind.
12:18As I believe, my next guest on the show will tell, but let me not preempt that.
12:22Let me, let's, let me, allow me to let Shalini Ravan make those comments herself.
12:27Maybe she differs from this.
12:28She's director and co-founder of Plan Ahead Wealth Advisors, Johnson & Sons.
12:31So, Shalini, good having you.
12:32Thanks for joining in.
12:33You know, we chose…
12:34Hi.
12:36Hi.
12:37It's been a long time that we've spoken.
12:38I'm glad we're talking today.
12:39Yeah.
12:40Thanks for having me here.
12:42The pleasure is ours.
12:43Shalini, what kind of people should take exposure to thematic funds per se?
12:49I mean, it should maybe not be a part of the core, but a satellite portfolio.
12:53But still, would you, in your wisdom, think that people should start approaching a thematic
12:59fund only after boxes A, B, C, D are ticked?
13:03What are those boxes?
13:04Yeah, you're right.
13:05To think in that direction, I would say that, you know, investors who are new to equity
13:12investing, for example, or newer to even mutual funds, we do come across a lot of investors
13:19who are recently being very attracted because of certain higher returns from, you know,
13:28thematic funds.
13:29For example, the defense team that we're talking about.
13:34I think you're right.
13:36There has to be a gradual understanding of risk and returns.
13:44Usually investors are, you know, more enamored by the returns and they forget risk somewhere.
13:51So after you've possibly done, you know, some investing in, you know, even debt mutual funds
13:58and even then diversified equity mutual funds, I think beyond that, possibly after a few
14:06years of continuous investing in equities and you have that better confidence and investing
14:12experience, can one actually venture into a thematic fund, I would say, because of the
14:17risk matrix being much higher than, you know, your usual diversified equity fund.
14:25Okay.
14:26Now, having said that, where do defense funds, any defense funds, I'll come to Motira also
14:31in a bit.
14:32Where do any defense funds fall under, therefore, with that criteria?
14:38Yeah, clearly, as you said, you know, thematic funds, now whether we earlier we had many
14:45different themes, like we had infrastructure, which was a theme which was very popular at
14:49one point in time.
14:51Even today, sometimes people are looking at banking or they're looking at IT.
14:57So just like, you know, one can slice any, you know, sector and make it a very strong
15:03concentration or a team for that matter.
15:06I think defense would possibly also sit in the same basket of being, you know, as we
15:14understand thematic funds, they are high risk and, you know, therefore high return.
15:19The caution, like everyone should understand, is the high risk sometimes plays out and the
15:25high return is not, you know, a guarantee.
15:31The recent, the last couple of, let's say about a month or so also is a case in point
15:37for the same sector that you're talking about, is that, you know, it had a tremendous big
15:43double digit, like some 70 odd percent kind of returns, if you see a one year return.
15:48But if you see the last one month or so, because of certain volatility in certain stocks,
15:52we are seeing like a little bit of a downtrend in the same sector and scheme.
15:58Okay.
15:59Okay.
16:00Now, there is a, there are active funds, there are passive funds, there is this Motilavasol
16:05product, which effectively tracks an index.
16:08Now, how do you differentiate between one versus the other, considering that one, there
16:17is one which is passive and some others might be active.
16:20But within passives as well, if there is a tracking of an index, which has got 13 stocks
16:24and the criteria for making it to the index are also difficult, and therefore it's not
16:29exactly a complete representation, if you will, of the defense sector.
16:35Right.
16:36So Shalini, how do you think about all the products available?
16:39So obviously, you know, one is that this team itself is fairly new.
16:46So to that extent, investors have to be a little bit more cautious.
16:50I think the first scheme in this team was introduced sometime June of last year.
16:55So that's also just completed about a year.
16:58And then we have a few new entrants that we have now, which are more on the passive side
17:04where they are taking basically investors' money into a nifty defense index fund, so
17:13to say.
17:14Obviously, the differences would be in approach.
17:21Obviously, passive will not have as much room to diversify the universe, if at all, we can
17:31say that.
17:32Whereas an active would have a little bit more room to add a little bit more longer
17:38list of portfolios if they wanted to diversify the investors' money coming in.
17:44So to that extent, I think the passive players will have a little less room in that sense,
17:50and they would run the risk of a little higher concentration.
17:55So probably the top 10 stocks would have like 80-90% kind of weightage in the portfolio
18:02construction.
18:03The benefit of a passive fund obviously would be that it will have a lower expense ratio.
18:10So in times when or in years when you do not have that good return coming in, you're kind
18:18of having a buffer that your expense ratio on your investments is a little lower, but
18:22it's just a tad lower.
18:24So I think it's important to kind of give it a little bit more time from an investor's
18:31perspective to see how and where and which schemes they want to invest their money in.
18:38At this point in time, from what I understand, the existing schemes also which are active
18:46also do have higher concentration because the universe itself is fairly small as I understand
18:52on the team.
18:53So broadly, a little bit of differences in terms of portfolio construction maybe from
18:58the product manufacturing side can happen, and of course, a lower expense ratio on a
19:03passive fund.
19:04These would be possibly the differences.
19:07Got it.
19:08Okay.
19:09Great.
19:10Shalini, so in a nutshell, if somebody wants to go out and take a risk, is the Motira Losal
19:19instrument a good one or would you choose an actively managed fund in a nutshell?
19:27I mean, personal view here again, obviously, someone which has a higher track record, I
19:32would possibly go with that kind of scheme.
19:36Having said that, the current longer track record scheme, which is the HDFC one is actually
19:43not taking in investor money as I understand at this point in time, even SIPs have been stopped.
19:51I think possibly it's a matter of timing in terms of the valuation of these schemes.
19:59So actually, at this point in time, I would actually reiterate to say that I would not
20:06be investing in this sector because the valuations have run up a little bit beyond what would
20:11be reasonable.
20:12And maybe from an investor perspective, if I were to look at it, there's not so much
20:16margin of safety if you're basically buying at higher valuations.
20:21At another point in time, thematic in a sense, yes, of course, people can invest some part
20:29of their money in thematic.
20:30As we started the conversation, we said that it cannot be a strategic portfolio.
20:35It has to be something that's tactical.
20:37It has to be something again, because it's higher risk, your orientation on investment
20:43horizon should be like five to seven years.
20:47At this point in time, one has a little higher, longer track record, just like about a year.
20:54The other ones are fairly new, but also, broadly, neither would be my suggestion at this point
21:02because the sector itself or the players there have run up in valuations quite a bit.
21:09Got it.
21:10Got it.
21:11Got it.
21:12Okay.
21:13Shalini, some queries as well.
21:14I would love for you to answer and help our viewers.
21:18First one is from a gentleman called Yogesh Dilip.
21:20Yogesh is 30 years age.
21:22The goal is one crore in 15 to 20 years.
21:26Started investing 11,000 rupees per month in mutual funds this month.
21:31Is it advisable to continue under the current market scenario or should he wait for the
21:35markets to go down?
21:36So, I would think that if someone is looking for equity investing, as we tell all investors,
21:45long-term horizon, he's already thought of 15, 20 years.
21:48So I think that's great.
21:50I think he can take that 11,000.
21:52I think the secret here is consistency, is that how can he continue his SIPs over that
21:5910, 15, 20-year horizon.
22:02If he is able to act a long-term rate of return, if he has around 12%, which has been long-term
22:10over 15 to 20 years, what the market has given, then he would end up with a one crore corpus
22:16in 20 years' time.
22:17Okay.
22:18So, well, stick to the guns, Yogesh.
22:21I think that will help you considering the time horizon is long enough.
22:26Promote Sulikeri.
22:27So that's a fairly easy query, really, Yogesh.
22:29But let's get to the other one.
22:31Promote Sulikeri, age 62 years, Shalini, is asking about whether it's a good idea to invest
22:37in contra funds now and do they offer enough diversification?
22:45So, yeah, I mean, contra funds by their name itself are contrarian in nature.
22:51They would obviously invest in stocks or sectors which are actually out of favour or maybe
23:00are strong companies, strong balance sheets, but are going through either a downtrend,
23:06a bad patch or something that they would need a few years to come out of.
23:10So usually, contra scheme fund managers would invest that way.
23:17Yes, there would be a concern around portfolio concentration.
23:24So if that's something that's just like you're fresh into mutual fund investing, then I wouldn't
23:33suggest contra funds.
23:35Then I would possibly suggest maybe even taking a very long term view on a simple diversified
23:41equity fund or a flexi cap fund or a value fund.
23:46Contra, as we explained, could have some calls of the fund managers going wrong.
23:57So if they had a shorter horizon, then probably, you know, even then, you know, a five to seven
24:03year horizon for a diversified equity fund or a flexi cap would be better than contra.
24:10Because as the investor has correctly pointed out, there could be higher portfolio concentrations
24:18because fund managers may have conviction in the ideas and may kind of make a concentrated
24:24portfolio based on the contrarian strategy.
24:28Got it.
24:28Okay.
24:29Shalini, one final question from Syed Yacoub.
24:32Syed says, Syed is age 32, is contributing 4,000 a month to NPS and have a five-month
24:39LIC life insurance policy, looking to invest 5,000 rupees in mutual funds.
24:44What are some good bets looking to invest in small caps and no time horizon given?
24:50Right.
24:51So again, I think good that, you know, someone in their 30s has got a good spread like NPS,
24:58LIC and now mutual funds.
25:01Again, I would say that, you know, probably just like we discussed, you know, valuations
25:07are quite important when you look at investing.
25:10Small caps by their nature are usually high risk and high return.
25:16So the high return is what usually is attracting investors, which is what's happening with
25:21a lot of mid cap and a lot of small cap schemes and a lot of mid cap and small cap stocks.
25:26They're attracting a lot of investor attention.
25:30At this point in time, based on the valuations that small cap schemes are looking at, I would
25:36suggest for him to basically look at either a Flexicap fund like Parag Parekh Flexicap
25:45or HDFC Flexicap or, you know, a value fund like DSP or ICICI Value Discovery.
25:53I'm assuming that this is not his first and only mutual fund scheme.
25:57If that were the case, I would actually stick to a very simple SIP or mutual fund scheme
26:05like UTI Nifty Index, which basically is a passive scheme.
26:10It just basically mirrors the Nifty 50 for the investor and the investor can expect to
26:16get index like returns into, you know, the SIPs or the equity mutual fund investments
26:23that he or she is doing.
26:25But yes, if they are someone who's, you know, quite like understanding mutual funds or accustomed
26:33to investing in mutual funds, then yeah, you know, one could look at, you know, the
26:37Flexicap or even the value category.
26:39Those look a little bit more reasonable in comparison to the small cap space.
26:47Got it.
26:47Okay.
26:48Shalini, I really appreciate you taking the time out and giving us all of these insights.
26:52Much appreciated.
26:53Thanks for joining in.
26:55And with that, it's a wrap on this leg of the mutual fund show.