Midcaps and smallcaps are troubling our investors. In the last three months, the midcap and smallcap index has gained minus 4.5% owing to the market volatility. But going forward, a lot of analysts and researchers are giving complete exit calls from midcaps. How are you looking at it? How are you sensing these two particular categories?
Midcaps and smallcaps as a category have maximum promising returns. But these categories have their own associated risk in the sense where markets are doing well. When the sentiment is positive, midcaps and smallcaps tend to do extremely well. These two categories are relatively less liquid.
When you are buying a stock which is less liquid and when more people buy than sell, automatically prices tend to move up sharply and valuation gets a little bit inflated in a buoyant environment. When markets are doing well, mood is positive, people are excited to buy. In addition to funds, even individual retail investors want to buy new stock. All that tends to create its own hype around mid and smallcaps. What we are witnessing right now is almost 16 months of consolidation as markets are not going anywhere.
When the largecaps are not doing anything, a bit of tiredness sets in and few investors want action every day where markets are going up. Whereas here, markets are flat and so they are trying to get out and in such a situation, midcaps and smallcaps tend to underperform. What we are witnessing is also the same thing.
Finally what drives stock prices – whether it is midcap or largecap – is their underlying profit growth. Historically also, midcaps and smallcaps have delivered higher profit growth. But an interesting aspect is may be not all 500 midcaps will deliver good growth but within that, the select 100 will deliver better growth. So, to that extent, when one is doing investment in a midcap and smallcap, investing through a mutual fund is far better than investing directly unless one knows the company in and out as a retail investor.
If one looks at the category per se, which consists of let us say 250 companies, some companies will do well, some companies will not. But by their very nature, midcap companies will deliver higher top line growth and profit growth because in India even today many categories — like tyres and batteries are one category where the largest company is a midcap company. Growth would definitely be higher in mid and smallcap companies but it is important to a) select the right fund, the right stock and equally important or more important is to have a longer horizon, three-five years. If one comes into mid and smallcap with a 6 months, 12 months perspective, one is bound to be disappointed. That needs to be avoided at any cost.
But what about investors who have seen bumper returns in the last two-three years in the same space, in the same category and are now slightly disappointed? Do you recommend them to pump in more money and stay invested for long?
That depends on their asset allocation call, what their financial advisor is doing. But in general, I would say that it is not a bad idea to book profits in general. Yes, it is, if it delivered great returns. We all love to see notional profits and also when we actually sell, money in the bank account. To that extent, it is not a bad idea to book profits.
But if your horizon is five years and the last three years have been great and you’ve made 50% return, book profit. You book that, put money in the bank and next week you want to buy one more stock or invest again, then it is not a good idea at all.
So, as long as you maintain this balance – a) it is not bad idea to book profits; b) if your horizon is five years, if you see whatever we see today has gone up as a 5X let us say 10 years but it is not a one-way street, those also have seen corrections. But if you are trying to time, then instead of making 500%, you made 50% and got out and then you are repenting why did I get out? So, I think it is important to keep that horizon in mind and see whether you are there for five years or for three months.
But then talking about valuations? Are they real right now or slightly overvalued?
I would say they are not cheap. As a fund manager, we would like to buy them when the price goes down.
Talking about the overall mindset that people have about having the right entry time into the market, with so much volatility around, should one be entering now or just wait?
We recommend investors to have a staggered approach. If you want to put in let us say Rs 5 lakh, do not put in one shot, put in over three months, six months. There are various methods available to do that in a systematic way.
One needs courage to enter the market at so much volatility also. Why is it important to have this kind of a strategy and also for the SIP investors because the mind works in a very funny way. When you see so much fear around you, you might as well stop your SIPs also and that is what people do all the time…
Whereas one is supposed to do exactly the opposite.
Exactly. This is the time when you can actually accumulate units. Why is it so important? What is the maths in terms of example?
Same thing, let us say you like a particular company and it is available at Rs 100. The market is doing well and it goes up to Rs 120 and then goes to 150. So next time you have the same let us say Rs 10,000; in the first slot, you bought at Rs 100,but when the market moved up, you are not able to buy the same number of shares, you will buy less. It works the other way when markets are going down. That is where it is important to have that courage.
I have one very simple funda while investing into stocks. Whenever I am buying a stock, I seriously evaluate if that stock goes down 30%, will I buy more or sell? If I think that I will sell, I will not buy that company. So, I should have that conviction that the company’s fundamentals are good and the prospects are good. I am buying at a particular price for whatever reasons in the coming months, the stock price actually falls, it is becoming more attractive so I should be adding more, not selling in panic.
That is what investors need to exercise. You talked about courage. The best thing to do is to put money in bank FDs which are zero risk but you have seen the returns that mutual funds have delivered are far higher than a typical FD has delivered. Most people are struggling to beat the inflation.
The moment you get into equities as an asset class, equity mutual funds, we have delivered very good returns. But there is an associated risk with that but that risk gets amplified when you are looking at a one year, two year but when you look at a longer horizon, there is hardly any risk. So to that extent courage is needed because you will make a higher return. You are rewarded for the risk that you are taking.
Are you taking any risk when it comes to your funds? Are you playing it up that well that, in the longer run, it is going to give benefits and returns to the investors?
Absolutely. I think we are here to take risks. Anyone who is buying equity stock, is taking a risk. If he is thinking that he’s not taking riska, he is fooling himself and others also. The moment we are buying equity as an asset class, there is an underlying risk. Our job is to take minimum risk, we have a philosophy that growth at a reasonable price and we follow certain rules to make sure that we avoid big mistakes.
We cannot avoid making mistakes. Let us be clear but at the same time, if I can avoid making big mistakes, even in something like a Nifty, relatively safer bets, even in the last one year, there are some stocks that are down 50%. So the risk is very much there. If we can avoid making such big mistakes, half of my job is done. So to that extent, I am taking risks every day, but I believe I am taking a calculated risk.
Let us translate this into action mode. What are your favourite sectors and the type of companies that you are looking at?
I would say growth at a reasonable price. I want to invest in companies that are growing because investing into equities is all about growth. But at the same time, I do not want to overpay for that growth. So that is our investment philosophy at PGIM. And right now, I would say two sectors that clearly fit into that framework are financials and pharma.
In financials, after last four, five years of tough times, we are actually seeing fairly decent credit growth, retail and corporate. So growth is there, the credit cycle is behind us, the NPAs are very low so as a result, profit is pretty good. So profit growth is there, not just top line growth. And the price that I am paying, versus historical average or versus the broader market is very attractive. That is where I have the higher comfort that the risk that I am taking and the return that I expect is definitely in my favour.
Then comes pharma. Pharma, is a relatively defence bet given the kind of uncertainties that we are seeing all around. The pharma business is relatively insulated, whether there is a recession or not, the consumption of medicine will not change per se. And also, these companies have at least two drivers, they are not dependent on only India.
India’s largecap companies, over a period of time have invested significantly to diversify their revenue stream. So only some part comes from India and the rest comes from exports. And in exports also, it is not that they have started this journey today, they have started this journey 10-15 years ago and made reasonable progress in those markets. As a result, there is a very high visibility on revenue growth.
So growth visibility is there irrespective of what happens to economies, including the developed countries. And b) I think valuations are reasonable. So I think that is where these two sectors are the most preferred right now.
In terms of triggers, when we talk about India and India growth story, what are those triggers that can ruin our mood or even derail the growth story?
The fundamental issue as we are buying companies as a fund manager is I am investing in companies. And as I said, I need growth and as we can see in the third quarter, we have seen certain pockets have disappointed us on earnings. We call India a consumption story but certain consumption stocks have delivered zero volume growth or lower single digit volume growth and the stocks are trading at 60-70 PE. So there is a clear mismatch there in terms of risk reward.
So to that extent, overall, we are definitely seeing certain pockets being weak, which means growth is questioned. If growth is questioned, everything comes to a standstill so that is the number one concern that I have, when it comes to companies. I will not say valuations are so much of a concern. Yes, we are trading at a significant premium to emerging markets, I think we will continue to trade at premium because India is not a one quarter or a one year story; it’s a five, 10-year story. So whenever that visibility is higher, markets will tend to trade at a premium. I do not think that will go away.
The other thing is globally in the last 30 years, we were in an era of easy liquidity. And from there, we are moving to quantitative tightening, inflation. So in the next few months we may or may not expect a lot of FIIs investing. The risk appetite is different, when they are making 4% risk free return there, why should they come to emerging markets like India? So that can play out.
Also, the fact that the government is also very much aware, our trade deficit is not a great position to be in. It is not that everything is great, but many things are in our favour. Wherever things are not okay, the good part is that the government is aware of it and they are working on it. So to that extent, things are manageable but at the same time, it is not fair to think that everything is great.
Now talking about the equity portfolio that investors might have, we understand that a lot needs to be decided as per your financial goals and the kind of asset allocation you have. But then within equity, where do you think is the time to go heavy?
That depends on the risk appetite. I am saying someone who has a higher risk appetite or a longer horizon mid caps will deliver better returns over largecap and other categories. Small can deliver higher, but mid and small stock selection becomes extremely important. For retail investors fund selection becomes important whereas if you are investing in a largecap, it is a relatively easier segment to invest in.
Do you think any hybrid kind of a strategy would really help investors?
Absolutely. That is what hybrid is all about. I am seeing there the fund manager is expected to make the change in terms of their exposure to equity versus fixed income and other depending on what is looking better on a risk reward basis. So to that extent, you know, for an investor who cannot make this choice of moving from fixed income to equity, investing in a hybrid equity, hybrid fund, which will do that makes immense sense.
Is it time to go slightly heavy even in fixed income?
I think so. When you are looking at the returns of 7% plus, fixed income is not a bad option at all. I think after two, three years of relatively muted fixed income story, this is a good time to have some allocation to fixed income for sure.
Is it the right time to exit a fund? What would that be?
It is more to do with investors, their risk appetite and their financial goals. I do not think there is any right time to exit a fund.
But then we talk about performance or comparing them with the peers or with the index. How should we take that call?
When you are evaluating a fund house, the process, the performance and people, all these are important. All four pieces are important. And whenever you see you have an issue on these four, one can take a call.
What kind of inflows is your AMC witnessing in the last few quarters? Amidst all this volatility, are investors preferring lump sum investments or SIPs? What is the trend in your AMC?
As many of you know, PGIM is relatively a new entrant. We are one of the fastest growing mutual funds. We continue to see a fairly healthy base of SIP flows into our funds. And that trend has been pretty healthy.
