Generating wealth in a short-term period in current volatile markets can be tough. Tarun speaks about the investor’s suitability factor which needs to be at the core of investing for any investor. He further sheds light on the pros and cons of investing in sector specific funds while sharing his views on which funds and sectors he feels are likely to do well in the near future.
SA: Considering the high expense ratio of Mutual funds, how can an investor achieve 8 to 9% growth which is requisite for gains?
TB: Let me address this question in two parts, first being is 8 to 9% achievable and the second being the high expense structure of Mutual Funds. The latest trend has seen a dip in interest rates by approximately 1.5%. The 10 years G-Sec yields are closer to 6%, while the short-term yields are approximately 5%. In this environment protecting your capital and achieving an 8% growth may not be achievable. One could consider investing in high-grade corporate fixed deposit where you can earn 9%, but this would mean investing in lower ratings, which is a call the investor needs to take based on his risk capacity. For the second part, the workaround is, if the investor is willing to oversee his investments on his own accord he could directly invest in direct plans for mutual. Alternatively, ETFs are a good option for investors looking to invest in instruments with a low expense ratio. What is critical here is the investor’s asset allocation along with the ability and experience to handle his investments when unassisted.
SA: The recent gold rally has stunned investors who are still looking to get in and maximize gains. What are the near-future prospects of World Gold funds (funds which invest in stocks of gold mining companies overseas)? How much is the risk for an investment horizon of 3 years?
TB: In the past year gold has proven to be one of the best performing asset classes with double digit returns. What has caused this surge? The real interest rate is negative globally and US treasurer securities are currently at -0.7% (post inflation. Historically, it is proven that in such environments of negative interest gold as an asset class does well and thus the rally. Apart from this, the uncertainties related to COVID19, the news of a second wave emerging as well as the US-China tension, all these aspects make a strong case in favour of gold as an asset class. In my opinion, a part investment in Gold should be added to your portfolios. Investing in gold could be in either 3 ways, you could opt for Gold ETFs or could alternatively opt for Gold Funds like World Gold Fund of Blackrock like we spoke of earlier. (Funds like these invest in the equity shares of the gold mining companies.) This specific fund has a 12-year history; in my personal rolling returns study of the past 3 years from a downside protection point of view compared to a Gold ETF this fund is much riskier. Being an equity product, if the underlying companies fail to perform, this failure will ultimately reflect on the performance of the scheme. The associated risk here is high with opportunity of a high reward. Currently, the most preferred and cost-efficient route today are Gold ETFs or Sovereign Gold Bonds. These routes give you tax-free returns on maturity, 2.5% annual coupon besides the appreciation or depreciation of the gold prices. An investor can choose one of these options based on his/her risk profile.
SA: Let’s take a live example of an investor, a 30-year-old who would like to generate wealth in the next 3 year. She is currently investing Rs. 1,000/- in Axis Blue Chip Fund and the Nippon India Pharma Fund each respectively and is looking to increase her asset allocation over the next 3 months. Please advise opportunities in short-term funds for wealth creation over 3 years.
TB: Let’s talk about suitability first, based on her query we know she has a 3year time horizon, she is 30, so age is on her side. But we are unaware of her risk tolerance capability. As per my knowledge, she is open to high risks. Keeping these factors in mind both the selected schemes look good to me. Axis Blue Chip Fund is one of the best top quartile scheme in the category which invests primarily in large-cap securities. It has always outperformed even when compared to the category making this a great scheme. The Nippon India Pharma Fund is a sector-specific scheme. Sector schemes are high in risk as compared to any other category. This is highest in the risk profile, but considering where we are in the current COVID19 scenario we are witnessing some interesting developments. Take the last 3 years for instance, pharma has been one of the worst performing sectors, but a year to date comparison pharma has delivered returns in double digits and has been the best performing sector. The demand continuity compared to other sectors is excellent in pharma. There is a global shift that is taking place, like talks about Chinese production moving to India. Considering all of this pharma will continue to do well. The Nippon India Pharma Fund has a good long-term history of approximately 14 to 15% in annual returns.
Based on the current environment a theme that may come under a high-risk strategy is investing in Banking Funds. Due to the challenges of COVID19 these funds have delivered returns of approximately -25% in the last year, but given the situation right now I foresee faster recovery by strong banks. This was witnessed even in the earlier 2013 and 2018 volatile environment as well where there has been an ROE expansion in all the high-quality banks in that environment. From that point of view, I am bullish about banking. Considering our investors have a 3 to 5-year horizon and a high risk profile she can consider investing in the banking sector as well.