The Mutual Fund Show: Should You Stay Invested In Digital Funds?

Many of these digital funds will continue to deliver reasonable returns from a 3-5 year perspective: Tarun Birani of TBNG Capital

<div class="paragraphs"><p>Monitoring stock performance.(Photo: Unsplash)</p></div>
Monitoring stock performance.(Photo: Unsplash)

While tech stocks have taken a plunge, financial experts recommend that investors stay put in digital funds.

Digital funds have a longer structural tailwind behind them relative to other sectoral funds, said Tarun Birani, founder and director at TBNG Capital Advisors.

While the returns and earnings growth for the underlying companies might not be as elevated compared to the last two years, and there may be a slow growth environment, many of these funds will continue to deliver reasonable returns from a three-five-year perspective, Birani told Niraj Shah on BQ Prime’s special series The Mutual Fund Show. The coming year-and-a-half will be a good time to build positions, he said.

“If you are an investor from a long-term point of view and have a high-risk appetite, you can continue to hold this strategy because IT and IT-enabled industry in India has significant arbitrage compared to other global corporates.”

According to Atul Shinghal, founder and chief executive officer at Scripbox, the digital funds segment is quite small compared to the universe of investable funds, and investing in them will require insight into specific areas of investment that the funds focus on.

Investors will need to have the ability, inclination and expertise to monitor the prospects closely, he said. Since it is difficult to predict sectors or turnaround of themes, Shinghal recommends diversified equity mutual funds investment.

For those who have already invested in these funds or are keen on such digital/technology funds, Shinghal advised them to continue to hold or buy with a long-term perspective, since the theme has done well in the past, and technology continues to be at the forefront of activities in today’s world. “We know the future lies in digitisation.”

Overseas Investments Through Mutual Funds

With the market regulator restricting overseas investments by mutual funds, should investors stop SIPs in such funds?

Shingal said investors should continue investing as per their schedule and not second-guess the opportune time to stop/restart, especially when the constraints are regulatory or market-linked.

While returns for some of these funds would have gone down as a result of low exposure to international funds, Birani advises investors to use the current correction as an opportunity to build positions.

But with the U.S. Fed rate hikes expected, the situation is fluid and one must spread investments over the next six-eight months, he said.

Watch the full interview here:

Here are the edited excerpts from the interview:

If someone has invested or have a continuing SIP in funds which have large digital presence, or if they are digital funds themselves such as fund houses like Aditya Birla which have a digital fund, is it a good idea to continue SIPs or keep the money invested in the case of a lump sum investment?

Tarun Birani: To give a quick background on the space: In the last six months, we have seen Nifty falling by almost 10-12%, and in the same period, the IT index or the Digital index is down almost 17-18%. So, you have seen that this sector has taken a lot more beating than the normal index.

From an average capitalisation point of view, it's a large growth-oriented strategy. This strategy is suitable for high-risk investors but I still feel there is a lot of tailwind left behind this entire digital space.

Most of these IT companies have shown accelerated high growth in the pandemic era and again, due to a lot of significant cost advantages due to work-from-home and no-debt, lean balancesheets, we have seen them doing very well.

Going forward, with the office structure coming back, you will see the operating cost structure have increased for most of these companies.

But again, if you are an investor from a long-term point of view, (say) five years, and you have a high-risk appetite, you can continue to hold this strategy because IT and IT-enabled industry in India has significant arbitrage compared to other global corporates.

So, one can continue but an investor who is more defensive and whose risk appetite is low, I would still recommend them to go for a diversified strategy.

Atul, what are your thoughts around this? Whatever capital is there in that fund is the capital that can also be invested elsewhere. Tell us if an investor should switch or stay invested?

Atul Shinghal: At Scripbox, we are a platform. We typically tell our clients to take a very goal-based view of their world and their investments. We will tell customers that this is your portfolio for the long term. Stay invested and keep investing is broadly our mantra and typically, we do not advise on sectoral or thematic funds.

We feel that fund managers are more capable, and giving them a broader mandate across diversified funds gives the normal retail investor a broader set of choices.

If people are planning to put in new money, I would definitely tell them to look at more diversified funds, if a low risk (investor), maybe large cap.

Coming to what you have already invested, given that you have invested and you knew what you were doing, hopefully, I would remain invested. This is a segment as such, and you trust the fund manager that within that category they picked the right companies.

We know the future lies in digitisation. Obviously I will plug my own company. Scripbox, being a digital platform, we believe the future lies in digital. So, it will be inappropriate for me to tell anyone to switch out of it.

But given fresh money, I would definitely think about alternatives rather than a specific thematic (fund).

Why not switch the existing corpus, which is also the wealth of the investor, into something else?

Atul Shinghal: Yes, I would have to look at the person's specific goals, objectives, how much of his overall portfolio is digital.

Trying to optimize X% of returns in a specific part of your portfolio is something we do not really look at or consider. We look at your overall basket.

I am assuming if somebody's invested say 5% to 7% of their portfolio, I would let it be because there is exit law and there will be tax implications. So, you will have to take a much more holistic view.

Fresh money has obviously a different answer.

A fund like the Aditya Birla Digital Fund doesn't just have IT services companies. The platform companies are a part there, and all of these have corrected significantly. There's no saying when it is that they will recover. Why should somebody stay invested or continue in SIP? Why not do it in some other diversified funds?

Tarun Birani: I don't have a specific update around this.

Any fund for that matter; it doesn't necessarily have only IT services?

Tarun Birani: I still feel there is a good amount of tailwind left in the IT-enabled services, and if you are a good, long term, structural investor buy on India, IT is one category one should continue to hold. Just because the market has fallen, one should not get out. If you have a high-risk appetite, you should continue.

Some of you have written to us about international investing and whether people should continue their investments into those funds. The true-to-label factor comes into play because these funds in part attracted money because they were able to invest in global stocks. Maybe, for some of these, the alpha came in, in a good way from their international investments. Now that this is not happening, should people choose other funds or should they continue with SIPs into some of these funds?

Atul Shinghal: Given the situation where these feeder funds have typically been stopped and there's been a cap, I would be surprised if you can continue to invest in it.

At an overall basket level, we recommend X percentage and depending on your need–your child is going abroad, you probably want to be more dollar hedged if you want to continue to invest in India. It's been quite empirically proven that these are uncorrelated assets over a longer period of time. Say 10-20% of your assets should or could be depending on your size of portfolio or your risk appetite and your goals are in international funds.

And if you have money in there, I would leave it there because you have trusted the fund manager, wealth advisor or planner to give you an X percentage of your allocation in international (investments), to diversify your overall portfolio.

Given the nature of these industries, I would recommend that if you have got a three-year, five-year or ten-year view, you would remain invested.

As regards fresh money, today, the overhang which is a change is driven by market conditions and regulations. Once that goes away, international should be an integral part of people's long-term portfolios.

The problem is that as of now these funds are not being allowed to invest internationally. Why continue with those funds? Why not bring a pause to the SIPs?

Atul Shinghal: What you have already invested, that's anyway there. Your SIPs do not work anyways. You have to obviously find alternatives, which could be in Indian equity.

As regards the alpha which was available through the international fund or the international part of the fund manager’s allocation, smarter fund managers will find alpha even in the domestic funds. And when time comes, they will reallocate what they have to. So, I wouldn't second guess the fund manager.

What is not allowed, I would not do. If I had an existing investment, I would continue.

In my overall portfolio basket, I would look at between 10% to 15% or 20%, depending on specific requirements as international. That's the broad reaction I would give.

Again, specific counsels for specific problems or specific circumstances will need to be considered.

Tarun, do you second this or could there be other options? The true-to-label aspect is not there currently. So, should investors pause their SIPs for the time being and restart them when the permissions come in. And till that time, use that money to invest in other options which might be more attractive?

Tarun Birani: In 2020, we started with almost 160 plus countries reducing interest rates. In 2022, we are in an environment where more than 200 countries have increased their interest rates. Inflation is a big worry and we are seeing a cooling off happening all across the globe.

The U.S. 10-year G-Sec Treasury bills are at around 230-240, which is 100-120 basis points higher. So, the environment we are in right now, you have seen the S&P 500 is down almost 15%, Nasdaq is down by almost 25%. You are seeing on these broader indices, there has been a good amount of correction.

As a value investor, one needs to have a minimum 10% to 15% allocation to ensure you don't have a home bias and are fairly diversified across the globe.

In this environment, I want to continue my SIPs and continue to invest in the global market because I am getting a 25% discount available, as compared to what it was six months back.

Coming to the kind of funds available in the market, there are two types of funds–one is a fund which is actually a feeder fund, which invests 100% into global funds; and there is a second category which has like 70% Indian market and 30% global market exposure.

In the first category, due to RBI restrictions, you can't invest further in those funds. But in the second category, there are popular funds like Parag Parikh, there is a fund from Axis, there are some from ICICI–they have funds which are 70% India focused and 30% global.

They continue to take the money, but when they take the money, they invest all your money into the domestic market. In turn, investors continue to get global exposure, maybe a little lesser, but I would actually be very happy because most of the normal FoFs are not taking global exposure.

I would be very happy if I can continue my SIPs in these funds because through this way, I am getting some quasi exposure into the global markets. That's a great strategy. I would strongly recommend that people should continue their SIPs in such funds.

How is it that the person continues to get quasi exposure? That is only to the extent that the investments are already made?

Tarun Birani: Let's say a fund which has investment AUM of Rs 100 crore, out of that Rs 70 crore is in domestic equity and 30% is into global equities.

Going forward, global funds are not allowed. You could say it is a bit of arbitrage available for some investors who want to continue with their global exposure. But you will not get that old exposure of 30%, but a little lesser.

In a market scenario like this where valuations have come off a bit and the global markets have also come off a little bit, what are the one or two categories and maybe a couple of funds within those categories that you believe people can invest In? This may not be an exhaustive list. You might have a lot of funds to share but you could start off with one or two examples within each of these categories.

Atul Shinghal: I will sound like a broken record (but) trust your asset allocation, trust your advisor, trust your wealth manager as to how it aligns to your portfolio. Trying to change that on a regular basis is suboptimal, unless it's unbalanced.

Having a certain portion of your investment in gold-related mutual funds is prudent. You can pick any of them, they are all similar. About 10% of your portfolio (can be in this form) if you don't have it, because these are uncorrelated assets compared to Indian equity and International equities over a 10-20-year period, and they typically tend to be a good hedge in volatile times.

Given what's expected, large cap as a category would be more prudent for people looking to expand the equity exposure because they are something which gives you the requisite equity exposure without undue risk.

Amongst the ultra-short or debt mutual funds, I would continue to have say 20-30%, I would continue to top-up.

I am assuming this is for fresh investments. If your asset allocation basket has got unbalanced for whatever reason–perhaps because of the 10-15% market correction–I would actually move money from some of my debt funds to equity at this point of time to get back to my asset allocation basket.

If you want me to give you specific scheme names, I will not be in a position to because we are a platform and since we create baskets rather than specific funds.

These are my answers: Add gold to your exposure, and within that, be more large-cap buyers than mid and small cap, and make sure your asset allocation basket is balanced.

Given that equity markets have come off a little bit, through a systematic transfer plan over the next 12-18 months, put money into liquids now and then move money into equity over the next 10-12 months. The cost averaging would not be a bad idea; it would be the prudent thing to do at this point of time.