Go for balanced and multi-cap funds, avoid smallcap funds: Dhirendra Kumar, Value Research

In an interview with ET Now,
Dhirendra Kumar,
Value Research,
says those investing for less than a year should not get attracted to the best performing debt fund as that could be risky

Edited excerpts:

There is a big debate on active versus passive. What do you choose as a mutual fund investor?

Every year I revisit this debate. So far the index funds have not taken off in India. But there are symptoms which will make indexing or investing in index funds fairly mainstream in the recent future. Indexing has not taken off so far primarily because the market was not highly institutionalised. A good part of the market is now being managed by or being actively managed by fund managers. The basic institutionalisation is very much in place. The cost of active management has gone through the roof. In India, the scale of expense is something which will start impacting the performance of the fund.

Also Indian equity funds have been seasonal and small so far. For the first time, we are witnessing at least 10 funds which are close to being Rs 20,000 crore. It has grown rapidly and now they are finding it hard to beat the index consistently. But still when we look at five-year or ten-year returns, some of the big funds still have a very compelling performance track record. They have beaten the index by a wide margin. But I visualise that because of the expense, because of the size, because of growing institutionalisation, things might change quite dramatically in recent future.

You are making a case that for someone who is in mutual funds for the long haul and I am talking about 10 year, 15 year and 20 years, one is better off starting with SIP in a Nifty ETF or a Sensex ETF. Forget about what some of the brilliant fund managers can do, just bet on Nifty ETF, if you are planning to create some wealth for your son or your daughter?

I do not think that time is right yet. The case is not strong enough right now because if I had invested my money in any of the ten largest popular funds in the past five years or ten years, I would have had one-and-a-half times more money than Nifty. So the case is not very strong right now.

But things will change soon. Most of the Indian funds have been able to run a fairly opportunistic portfolio where they were not committed to investing in largecaps or midcaps or smallcaps. They were go anywhere funds and that is what we have witnessed. But now they have been forced to be in largecaps. So their ability to manoeuvre themselves has come down dramatically.

If you look at the best performing largecap funds over the last one year or three years, it is not the Nifty fund but rather the Nifty junior fund. If we look at the largest Indian equity fund which has come up from nowhere, it happens to be Nifty index fund because the EPFO has started investing in index funds. So the popularity of indexing is also a self fulfilling prophecy. As more and more investors invest, funds get…

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