Feroze Azeez on funds to get into and funds to avoid

Feroze Azeez, Deputy CEO, Anand Rathi Wealth, says “you can look at DSP Equity Opportunities, HDFC Flexi Cap, Quant Value or Active, one of these two, both have a very similar strategy. You can also look at SBI Contra, Aditya Birla Small Cap. I think five are good enough. Let me, let me refrain from giving more. These five schemes are to be bought as a combination. You cannot pick one of them and expect that same one would do better because there will be some schemes which will not do well. So, buy all five, even if you have Rs 2500, spread that thin enough as Rs 500 into five of these SIPs.”

Let us start off with a small recap from last Diwali to this Diwali. When you talk about having your exposure across market caps, a lot of place has been taken by midcaps and smallcaps, which now can be pared maybe you can go heavy in largecap. How exactly has the entire year from last Diwali to this Diwali changed in terms of debt and equity scenario? How much have investors earned?

Investors have earned generously. They have been equity heavy. Now, of course, it has been an eventful year and the events have favoured India more. The events which have been detrimental to the globe have been positive for India.

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Generally in the last 16-17 years, of me being in this profession, I have seen that global problems have always visited India has but this is the first time I am seeing a problem in the globe, largely interest rates and inflation and India is not having that problem because India has always had a high interest rate, high inflation, that is point one.

Point two, we went very heavy on equity from 2020 August, from the Covid time. So, we continued our bullishness across two-three Diwalis on being positive on equity because we had seen that the earnings of Nifty companies were supposed to be moving higher.

So, Rs 572 is what the earnings of Nifty companies were in the year, then it moved to Rs 772 and then Rs 820. This year, we are expecting it to move to Rs 944, that kind of earnings growth has not been seen consecutively for several periods. So, equity heavy continues to be equity heavy. Second, we think that the debt market is a more complex market than equity.

Fortunately, the debt fund investors have not lost as much money as they could have because RBI tightened its liquidity and also increased the interest rates by significant amounts but the 10-year government paper of India has marginally moved by half a percent. In the same period, repo has moved up by 2.75%. So, that is a great cushion.

So, people have not lost money on the bond side., I personally think the third point, which we went very bullish on at the beginning of this year largely because you are one of the best mediums to reach the largest universe in the country, was to go heavy on smallcaps and that paid out. I still believe there is more juice left for the next few years.

So, talking more about smallcap in this one year’s time, what has been the performance like?

The performance in absolute terms on the index has been 38-40%. But if you look at its relative performance with respect to Nifty which is a very good way of or a barometer for equity measurements, about 25- 28% extra return over Nifty is what smallcaps have delivered and that is a substantive move upwards and if you look at today also, if you look at Nifty smallcap 250, the level of that index which most people do not track is about 12,000.

We estimate the earnings of this index to be Rs 636. The smallcap PE over the last 22 years could be considered to be 23 as a fair PE. What is PE? PE is nothing but the price divided by the earnings. If the price is 12,000 and the earnings hopefully for this year are 636, it is still lower than 20 PE. We believe that smallcap stocks are obscenely valued, but on the same hand, there are several 50-100 stocks in the 250 which are not valued as much. So, smallcap still has juice because the fundamental valuations are at 14,000 but the current level is at 12,000.

You have various types of clients – retail, HNI, ultra HNIs. I want to understand the kind of investment trend that they have followed in this one entire year. What has been an extraordinary or a new trend that you must have noticed among retail investors, HNIs and ultra HNIs?

The retail investor this time very clearly exhibited that the actions which he or she is taking are not on the basis of greed or fear.

What triggered that kind of a mindset?

What must have triggered is education. Firstly, is this intuition correct or not? In October 2021, the market was at 18,500. In October 2023, which is two years hence, the market on October 26, the last month’s expiry, was 18,850, which is give or take, almost the same for two years. So, markets did not do anything for two big years, but the SIP numbers moved up from 10,000, 11,000 to 16,900.

In the previous regime, when people were only looking at past performance, greed and fear and acting, if such market volatility is seen and flat markets are seen, SIPs would stop, not increase. I think it is a right intuition because retail investors are still there in spite of two years of almost no return on a year-to-year basis and also the fact that it has gone up, I personally think education is the big cause and all stakeholders are to be commended for that, that is starting from SEBI, AMFI, mutual funds and largely the media houses like yourselves.

So, from last Diwali to this Diwali and now from this Diwali to next Diwali, we have seen the performance across the asset classes, what has performed, how they have performed. Going ahead, across asset classes, where exactly is the duration play that you can opt for?

See, Diwali to Diwali, a year like this comes once in five years. Why, because we have a general election encompassed between these two Diwalis. So, this to my mind is an opportunity more than an adversity. Since the Nifty is still at 19,400 and it had a PE, when the markets were at 11,000 two-three years back, it had a certain PE.

Today also, it is the same PE in spite of the market rally because earnings have also gone up significantly, not just the price. So, this is election wali Diwali and I hope election is also a muskan, hopefully, has a larger significance, larger importance. We checked five elections and we realized that election years are actually great one-year investment periods for equity.

Not that I am recommending a one-year equity investment, not in my wildest of the dreams, but even a one-year investor during elections has not lost money and there will be a lot of money which will flow into India if the capital market gets an election mandate which is to its liking. That is the third continuity. Capital markets always like continuity. So, if there is a third mandate to the government, I think capital markets will rejoice and there is a lot of money which is waiting for this event to be behind us and FII monies will flow lock, stock, barrel if this were to happen. I, being a long-term investor, would have most of my money invested before this general election has passed.

What about gold and the current rate cut scenario which seems to be slightly far off now. Is it time to have money in gold?

Gold per se I do not like as much but if you superimpose some benefits of gold, then I start liking it. If you look at sovereign gold bonds, they are gold plus 5%. Sovereign gold bonds are like gold plus 5%, 2.5% of interest plus 2% of tax discount. So, 5% per year is if gold standalone in the rupee terms gave 8% if I bought a bar from the jewellers and a sovereign gold bond in the same period can give me 12-13% on a tax basis. On a pre-tax basis equivalent, it is a great asset.

Gold is not a great asset in dollar terms though in rupee terms, gold is still a good asset because rupee depreciates over long periods of time. That is superimposed with not buying bars and coins but buying a sovereign gold bond is like rupee depreciation plus the benefits of sovereign gold bond make a sovereign gold bond a very, very attractive instrument to be in the portfolio.

What kind of funds should investors be investing in now considering it is Diwali and it is also a very auspicious time to start your investments going ahead. What are the funds that you might want to recommend and what is the kind of analysis that you might want to put on it?

One thing before I get to what is the segment in which an investor should be, let me also give some guidance based on mathematics that what you should not be buying. I have done a lot of study and my colleagues, of course, have supported me in that study, and found that if you buy a sector fund, you are going to be chasing your own tail because in the equity markets, sectors are very dynamic.

I was very bullish actually in the June quarter on IT. In the September quarter, I am bearish on IT. And in the middle, IT outperformed Nifty by 7-8%. But can an investor get in and get out in three months? He will have to pay short-term capital gains, he will have to pay exit loads. So, do not ever do sector fund. However, on paper, you can see so much profit, but you will never be able to realize it. That is what data says.

Second, do not get into funds which do not have three-year data. So, do not buy schemes which are one year old, six months old, NFOs. You have to base your decision on math. And if there is a fund which does not have math, how are you investing? That is my question. So, do not do these two.

Now, what to do is the more important question, of course, coming back to your pointed requirement. I would say that I can give you six funds as a viewer. Not that these six funds will be the greatest funds, but they bought in a combination have the potential to beat the Nifty by 3%, if that is your expectation.

Of course, out of these six, there could be one or two duds. But if you do not do mathematics, out of six, four are duds. So you are trying to do mathematics to have lesser failures and more gain. So, you can look at DSP Equity Opportunities, HDFC Flexi Cap, Quant Value or Active, one of these two, both have a very similar strategy. You can also look at SBI Contra, Aditya Birla Small Cap. I think five are good enough. Let me, let me refrain from giving more.

These five schemes are to be bought as a combination. You cannot pick one of them and expect that same one would do better because there will be some schemes which will not do well. So, buy all the five, even if you have Rs 2500, spread that thin enough as Rs 500 into five of these SIPs.

A small Muskanwali Diwali wish for our viewers and a pro tip once again.

Net, net money is just a means to be happy. It is a necessity but not a sufficient condition to be happy. So, my wish is that each one of you not just get money and that kind of wealth, but also the wealth of relationships because relationships are a necessary and sufficient condition to be happy. May this Diwali bring you prosperity on the wealth side and also on the relationship side, so that muskan is retained for the full year.

Roy Walsh

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