Think long-term and stash up on mutual funds, says financial experts

Investors who feel they missed the bus because they failed to shovel their money into stocks and mutual funds last year need to stop wringing their hands over a missed opportunity.

There is still a lot of room left on the upside.

That is the verdict of financial experts such as Deepak Jain, vice-president of Edelweiss Asset Management Company (AMC), and Shibu Das, director of Fine Advice Pvt Ltd, who specialises in helping investors negotiate the risky shoals of investment.

“In April last year, the Sensex sank from the highs of 50000 to almost 27000 — an almost 44-45 per cent fall… But in the collective view of the market, April 2020 was the worst phase,” says Jain.

The market reckoned that everything from here on could only get better. “And that’s pretty much how it has all played,” the Edelweiss honcho said at a recent webinar held under the auspices of ABP Virtual Insight.

Jain believes there are several reasons why the market has run ahead of a still-stuttering economy, anticipating gains as companies start to recover from a dire, once-in-a-century kind of crisis brought on by the Covid-19 pandemic.

Firstly, investors should never look at cash flows in a business — the fundamental basis that underpins equity valuations — from a one-year perspective.

“Businesses are in here for perpetuity. You would like to evaluate the cash flows of a business over a 10-, 20- or a 25-year period,” says Jain.

If you take the longer perspective, a crisis recedes into a mild kerfuffle. The markets bounced back within a year after the global financial meltdown in 2008; it’s happened this time as well. “The market bet positively on the future and it has really worked well for people who invested (during the downturn),” adds Jain.

Jain adduces another reason why investors ought to take the longer view. Central banks around the world have slashed interest rates — and liquidity is sloshing around in every conceivable market. “When you value any business, interest rates are very important,” he adds. “So, from a higher level of 6-8 per cent on a 10-year basis, the rates have tumbled. The overnight fund rate is way below 4 per cent —and that means there is a lot of cheap money available.”

Shibu Das amplifies on how falling interest rates have badly crimped returns in competing asset classes — bank fixed deposits for instance — triggering a shift towards mutual funds. “People are looking at various options to de-risk their portfolio. Earlier, investors in India were only looking at fixed-return instruments like bank deposits, and the safer schemes in the mutual fund industry. Slowly, the retail investors started investing in equity funds. Now, they want a portfolio that includes a global fund,” he says.

Jain tosses in a data point that buttresses this shift towards mutual funds. “We now have more than 5.5 crore demat account holders in India. Compared with May 2020, the registrations have grown four times,” he says.

“Equity markets were also bolstered by the so-called TINA (there is no alternative) factor of lower interest rates,” Jain believes.

Das says the shift towards mutual funds all boils down to practical considerations. “Fixed deposit rates have come down to around 5 per cent. Throw in the 30 per cent tax element (levied in the highest bracket) and your return automatically falls to 3.5 per cent. Inflation is around 7-8 per cent. So, people know that putting money in a bank — which is supposed to be safe — is actually not safe,” he says.

People need to stay invested in  mutual fund for the long term. People who invested in mutual fund schemes 25 years ago have seen the net asset value of the Rs 10 unit balloon to Rs 1,700 “which is a 170 times growth in 25 years that translates into a 20 plus CAGR (compound annual growth rate),” Das claims.

“Even if you don’t see that kind of return (in future), who stops us from expecting a return of 12 per cent CAGR over the next 20 years? That is possible,” asserts Das, arguing that taxation queers the pitch even further. “The simple trade-off is between a bank fixed deposit that offers a 5 per cent return and is taxable at 30 per cent against a mutual fund that could give you a 12 per cent return with a 10 per cent long-term capital gains tax.”

“The arbitrage between these two instruments is so high that it has led to a natural shift from bank deposits towards mutual funds. It is happening — slowly but it is happening,” Das adds.

The pandemic has made investors — who have cut back sharply on discretionary spending and parcelled out their resultant savings between banks deposits, small savings schemes and mutual funds — only too keenly aware of the need for an emergency fund to tide over the hard times brought on by a crisis.

“The great learning in this pandemic is that we need to plan for an unforeseen event… maybe not for three months but a little longer…perhaps 15 to 18 months,” adds Das.

Both experts believe that investors should exercise discipline in financial planning — and resist the overpowering urge to dump their investments at the first sign of trouble.

The webinar, which is posted on Facebook, weighs in on a variety of investment and has already racked up over 1 lakh views. If you haven’t caught it yet, you can watch it at: https://www.facebook.com/ABP-Virtual-Insights-with-Edelweiss-MF-108414431470574