The Mutual Fund Show: Don’t Break These Rules Of Investing

Manage expectations and stick to a long-term plan. That’s the best advice Sundeep Sikka has for mutual fund investors.

A stop sign stands outside an automobile assembly plant. (Photographer: Anthony Lanzilote/Bloomberg)
A stop sign stands outside an automobile assembly plant. (Photographer: Anthony Lanzilote/Bloomberg)

Manage expectations and stick to a long-term plan. That’s the best advice Sundeep Sikka has for mutual fund investors.

The executive director and chief executive officer at Reliance Nippon Life Asset Management Ltd. said investors have a tendency to get carried away with their investments when the market goes up or down.

It is important to stick to a plan, if you talk about the goal-based planning. Never start and stop investing based on market levels. It is more important to keep investing based on a plan.
Sundeep Sikka, CEO, Reliance Nippon Life Asset Management Ltd.

Watch this week’s episode of the mutual fund show here.

Here Are The Edited Excerpts From The Conversation

Have you seen the shift in Indian behaviour in the first 7-8 months of 2018 versus what we saw in the past? At the first sign of volatility, are new investors coming in mutual funds trying to change his behaviour?

Sundeep Sikka: We have seen that wherever there is volatility, investors panic and the first action is withdrawal. In our asset management company, the first quarter of this year have done 28 percent more SIPs than what we have done in the corresponding year-ago period. During this period, there was a peak in volatility after the budget and long-term capital gains tax. But investors are maturing and they realise that investing through long term particularly comes from SIPs and such investors are not vulnerable to market volatility. The investors who are more vulnerable to market volatility are high net worth individuals who invest in lump-sum. The very important change which is taking place is in the quality of assets.

Earlier, 80 percent of the money were lump-sum. But this time it has changed. Almost one-third of the money is coming from SIPs. When money comes in and you are investing in small amount, then this is lazy money. This is money leaving your bank account and you don’t even realise it—like a regular EMI, telephone or electricity bill. It is becoming a habit. When small amounts go every month, you don’t track returns, you don’t see what is happening in the market, you don’t worry of dollar at 70 and you don’t worry about oil. One big change that has happened in India is in the quality of investors and that of investments. This gives us confidence that it is going to be a very strong foundation for times to come.

Are investors warming up to the idea that instead of keeping money in fixed deposits or corporate bonds, they are shifting to mutual funds because that is faster and safer way of achieving financial independence?

Sikka: For us as an industry, we have to do a lot of education. Investment behaviours change over generations. They have been told that gold is a better investment bet or there is nothing better than having real estate. Now, we are educating that financial assets have their own advantage. You can be wealthy and have real estate, but you still may not have liquidity, that big change is taking place. No matter how much credit we give to the mutual fund industry, the Jan Dhan and the JAM (Jan Dhan-Aadhaar-Mobile) schemes have changed the way Indians have been investing.

Earlier there used to be a parallel economy. All that is over. Traditionally, we have moved away from the time when interest rates offered a double-digit return. We, Indians, used to confuse investments as money lying in bank for years thinking it is good long-term investment. But now interest rates being 5.5-6 percent, this money is flowing into the mutual fund industry.

From our perspective, right now it is hard to educate as investors are coming for the first time. Everybody tests the market for smaller amount of time. We also have Rs 100 SIPs. We have SIP insure where along with SIPs we give insurance policy. So, we are trying to change the behaviour. Changing investment behaviour is not easy. It takes generations. People have notions. Equities always have been the dirty word. Lot of Indians thought that equity is like gambling, but it is changing now. I am happy and excited that it is showing signs. We are now in about 300 cities in India. We were in 100 cities where people don’t know what a mutual fund is. It is very good business for us, retail is the stickiest. It is good for the country, industry and company, too.

Among other things, a lot of independent and mutual fund websites are trying to get people to do is help them invest for particular goals. There are various allied ways and methods that the industry and intermediaries are now trying to provide to the end-user.

Sikka: That is a very interesting change. Earlier, people thought that mutual funds were only for wealthy investors. The mindset is changing. People are seeing mutual funds from a long-term point of view. They are realising the long-term advantage of investing. There are two types of investors—those who know what they are doing and there are others who don’t know the nitty-gritty of the whole thing, but they know their goal.

The sooner you start the better it is. People are getting educated. I will also give credit to the media. There were no such shows many years back. You are helping us to take this to smaller cities and towns. We have seen that in the last 2-3 years people are excited of what has happened, and it is the tip of an iceberg. For me the dream is every Indian household must be a mutual fund investor. At this point of time, not even two percent of the households are.

Is there anything that you want to caution the investors about?

Sikka: Ultimately, it is all about having the right expectations, having a long-term plan. Many times, we see investors get carried away and start investing when the markets are going up and they stop investing when they see markets are volatile and are coming down. Actually, that’s the time when investors have to invest more. My advice to investors is volatility is your friend. It is important to stick to a plan if you talk about the goal-based planning. Never start and stop investing based on market levels. It is more important to keep investing based on a plan.

I would strongly advise to stay away from market flavours. There are times when you will hear that this fund has become the market flavour, so let’s go for balanced fund or seasonal fund or as dollar is touching 70, then pharma or IT. It doesn’t work like that. Investments are long term and they have to be based on a goal. You can’t be timing it based on market conditions.

My final advise is while mutual fund is a great category, it is important to deal with asset managers. You are giving money to someone who has gone through different market cycles. So, there could be a fund or a fund manager who has done great in the last one year, but they do not mean that for the next 20 years it could be good.

The strong advice for new retail investors is to stick to fund managers and asset management companies which have a track record of 15-20 years and have seen market cycles. That should give market confidence. This industry is young, we are seeing new investors and fund managers coming in, so the experience is to try and navigate to new market cycle. But it is important to deal with asset management companies which have seen different market cycles.

Please talk about the options available for people having a near- to far-term goal. People may think that if I want to invest for one to one-and half-year then would equity be the right thing? But are there other options available?

Sikka: There is a notion that when we talk about AMC and the mutual fund industry, people think it is only about equity. Two percent of household savings come into the capital market. When we talk about the mutual fund industry, 90 percent of investors only come into equity. So, people forget that there is debt and gold. There are various other things with which you can create the right portfolio. If you are investing in equities, then your investment horizon has to be 5 years-plus. It is important for investors to be careful, volatility may not go in your favour. While I said volatility is your friend, you can be caught on the wrong side. So, anything less than 5 years, is a straight no-no for equity.

Investors who are not very matured must not invest in lump-sum. It is not the way to do it and you need to at stagger it. As far as fixed income is concerned, from long-term point of view, fixed income bond funds and even the money market funds, saving account rate is 3.5-4 percent. For money market funds, cash funds have given far more returns. So, we are seeing that behaviour is changing. Lot of investors and even our employees give part of their salary which goes into liquid funds and with mobile application they can switch it wherever they want. Mutual funds are not only equity, but debt and fixed income. From one day money to a retirement product, people invest for 25-30 years. So, it is across the spectrum, but you have to get it right. If you don’t know what to do, then go to an advisor.

Nowadays, we have been hearing about direct mutual funds schemes. It is very important for people to understand that the direct schemes will have lower expense. It might seem like it is giving a better return but there is mis-selling. There is also wrong buying. Investors might not know what is good for them. There is Reliance Growth Fund for 20 years. If you were to see the difference between the two funds, the best fund which is there for 20-year period has grown 100 times. Another fund during the same period has grown 10 times. So, Rs 1 lakh in their fund has become Rs 1 crore and the other fund has become Rs 10 lakh over 20 years. Just think even you have saved 70-80 basis points, what you have lost. There are direct plans, but investors need to be very careful. I think there is a need for financial advisors to create a portfolio for you. Lot of times people take emotional decisions like when markets are high they invest more as they think it will go one way. When markets fall they don’t invest as they think it will only go down. So, you have to control your emotions and stick to a plan. It is important to have financial advisors who will create wealth for long term.

Would you believe that there is dichotomy that India, for the next five years if not longer, is still different market for mutual fund investing compared to the West?

Sikka: In India, ETFs till now have not done so well. But we are quite bullish on ETFs. We acquired Goldman Sachs India operation, which was the earlier benchmark. We try to paint everything with one brush. We need to understand that there are different kinds of investors. There are investors who know what they want. There are investors who have to be pushed into the mutual fund industry. When we operate in a lot of small cities and towns people were investing in fixed deposits and gold. You cannot expect them directly to jump to ETFs. They will first take exposure into the capital market. Then mutual funds and SIPs, which will be later of higher expense.

There will be other investors who believe that from a long-term point of view the alpha generation may or may not be there. They have got freedom to go to ETFs. From our point of view, we see us as a super market. We have active funds and ETFs. Clearly, there is a different market for both. We have seen institutional investors like to take a call on market through ETFs. And at the same time a Rs 100 investor will never get into ETFs. So, both will co-exist. We are preempted and trying to jump too fast. In the U.S., ETFs started in early 2000 and the equity culture in the U.S. started way earlier.

For expenses, it is not like-to-like comparison. In India, I will not justify whether the expense is less or not. But in like-to-like comparison, in the West a lot of money which comes to asset managers is wholesale money. There is an aggregator, who is getting the money, comes to you, managing the mandate but the total cost given by the investor is the cost which will go to the aggregator, there is cost which will come to asset manager. In India, it is different, it is all put together. Today for us, when we operate in small northeastern states, smaller cities across the country, it is all fully encompassed like the cost of distribution and the cost of managing. Costs may not come down because there are regulatory reasons. They will come down if the industry will not add value. It is nothing to do with a regulator.

Many times, you put everything on the regulator. Here it is more a case of as an industry and mutual fund investor if I can add value then I have the right to charge more. If I can’t, then I should not be and that’s the way we see it. In a large-cap fund, let’s look at the last one year. The best stock has been the Nifty because it is not broad-based, and the five stocks that have been driving up the market. ETFs have given better returns. If such a situation continues for long, I cannot accept active funds to be charging a high fee. Some investors will move to ETFs. With 2 percent of the population investing today, I think it is a big pyramid. You will have new investors coming into mutual funds. People who are getting educated and are focusing on expenses and alpha may move to ETFs. From us, we will offer everything and will leave it for the investors to decide what is best for them.

How does a lay investor distill all of the noise and figure out what kind of activity or action he should take?

Sikka: Investing is lot about emotions. When you see that the fund you have invested in is down 20-25 percent, all emotions come as what have I done. But those emotions are never there when you invest in gold and real estate. The core of the issue is that there is excessive information available in the industry. I think returns less than 3 years should not be shown as an industry. We should stop showing as it confuses investors more. There is a plethora of information available. There are reports of one week and 10-week returns. So, what does a layman do? He is bound to get confused. Be very choosy in what you have to do. Don’t go with the flavour of the season. Stick to a plan. Have an advisor. Control your emotions. You don’t need 20 asset managers. You don’t need 20 schemes. To create a good portfolio, what you need is three-four asset management companies, six-seven schemes. Look at asset management companies who have 15-20 years of experience and have gone through different market cycles. It is the job of portfolio managers to address those when the portfolio goes down 25 percent and not the investors’. When you fly during monsoon there is a lot of turbulence. You are just supposed to put on the seat belt and sit calm. You are not supposed to jump and take too much action.