The Hindu Business Line : `We want investors to see mutual funds as a long-term investment' — Mr S. Naganath, Chief Investment Officer, DSP ML Investment Managers

Investment World - Interview
Markets - Mutual Funds

`We want investors to see mutual funds as a long-term investment' — Mr S. Naganath, Chief Investment Officer, DSP ML Investment Managers

Suresh Krishnamurthy

People can reflect on investments such as property where simply by staying invested after making a good choice in the beginning, you really reap the rewards after 10, 20, 30 years. The same lesson should be applied to equity investing.

MUTUAL fund managers are having a good time. Funds managed by equity schemes are growing rapidly in size. It is, however, not rosy in every sense. Equity funds are in search of long-term investors. By their reckoning, investors stay with them only for short periods. To induce long-term money to stay with them, DSP Merrill Lynch has now launched a product that combines a long-term systematic investment plan with term insurance. In an interview to Business Line, Mr S. Naganath, DSP Merrill Lynch's Chief Investment Officer, talks of the product and other issues relating to equity funds management.

Excerpts from the interview

How is this product different from a unit-linked insurance plan?

This is an investment product that enables investors fix a goal, try to meet that through systematic investment, benefit from the power of compounding and rupee-cost averaging. There is also an overlay of insurance cover. As far as Unit-Linked Insurance Plans (ULIPs) are concerned, you will have to make the comparison. There are many products in the market that are popular. As for the costs and track record of ULIPs, I will leave that to you. I don't want to get into that.

Why are you not offering an option where there is no insurance cover?

That is already there. You can even take a fifty-year SIP now. It is up to the investor. You can fix the term. The point is would the investor be disciplined enough to continue. Today, a guy starts with a 50-year SIP but may stop it after five months. That is fine. In this case, he knows if he stops it, he loses cover.

SIP is about rupee-cost averaging. There are calculations that indicate value averaging has worked better. What is your take?

(Rupee cost averaging is investing a fixed amount on a regular basis, say, monthly. In value averaging the amount invested regularly is adjusted up or down to meet a prescribed target. If prices are up, you invest less in value averaging. If prices are down, you invest more.) I have not seen any arithmetic on that. We have done number crunching on rupee cost averaging and we feel that it works well across market cycles. The trick is to make investments for a longer period. We are not saying you make investments with a three- or four-year perspective. If you take a 10- to15-year perspective, I am sure you will cover various facets of market cycles and it should still work to your advantage.

Mutual funds are viewed as a short-term option and ULIPs are viewed as a long-term option. Is it fair?

No. Insurance is clearly looked upon as a long-term product. Our new product will hopefully seek to redress the perception that mutual funds are seen as a short-term product. We want investors to consider mutual funds as a long-term investment product. Indeed, we want investors to consider equities as a good long-term investment avenue.

Why are mutual funds reluctant to introduce fund of funds that would invest in equity schemes of other mutual funds? We have been looking at it. There are some issues relating to costs, taxes and technology. You will see such products in the next six-to-nine months. In this case, the investor has a basket of five funds to invest and switch amongst the funds.

With respect to your personal investments, what is the kind of asset allocation you follow?

I would say that 50-55 per cent of my portfolio is in equities. I think about two-three years ago, that was more like 35-40 per cent. The rest is in debt instruments. I have some portion of this in DSP funds. I have a core holding of equities, which has been there for a long time. Most of my mutual fund investments are in DSP ML schemes. I don't buy several equity schemes of other mutual funds. I do buy schemes of other mutual funds but rarely.

Has your personal portfolio beaten the market or your funds?

(laughs) I have not done that analysis simply because a lot of these are long-term investments. By and large, I buy and hold them.

But this buy-and-hold approach is, however, not a feature of equity funds' investment strategy...

There are two reasons for that. Performance is analysed on a dynamic basis. Clearly, if one knows how a stock will do on a five-year basis but will not do anything for the next two years, it tends to drag the performance of equity schemes down in the short-term. Then, what happens is people would say, `I will not buy this fund because this has not done well in recent times.'

I think the open-ended nature of schemes coupled with this very intense analysis of performance on a daily, weekly, monthly basis does not allow the kind of leeway for the fund manager to buy and hold stocks for the long-term. That is where this SIP comes in. Once the fund manager has some long-term money then he can buy and hold stocks for the long-term and generally manage funds better.

Do you think that the market does not penalise short-term holding periods?

It depends on what cycle you bought and sold the stocks. If you look at the technology stocks, if you bought them in 1994 or 1995, after two years, your money would have doubled and if you had exited, you would have missed a huge bull run. It depends on what point of the cycle you are evaluating this.

Is there a case for a close-end equity fund now?

There is a lot of interest. We are also looking at it closely. It is a function of demand. It would also allow us to invest by taking a long-term view.

Can they make a difference? Can they do better than open-end funds?

Time will tell but my instinct tells me that they will do well. Some of the competitive pressures will not exist allowing fund managers to take a long-term view as opposed to judging if this stock will add to my portfolio performance in the next six months. That is the current approach.

In terms of expected returns from stocks, are the assumptions different across stocks?

It does differ from stock to stock and is driven by what growth you see from a particular sector and the overall earnings growth for the market.

Would it be between 12 per cent and 20 per cent?

It depends on the capital structure, size of the company but, yes, it will be in that range. It is a wide range but it is company specific.

Is your advice to investors based on an expectation that the return will be between 12 and 15 per cent?

Yes, you are right. Over the long term, the markets have historically shown that they can deliver returns of about 15 per cent. We don't see any reason why the markets cannot deliver such returns going forward.

What is investor response when you say you are bullish about the markets and say in the same breath that you are expecting 12-per cent returns?

It is a function of the most recent market performance. If the market has risen 50 per cent and you say you can expect 12 per cent next year, I don't think that is well appreciated. A more rational expectation is for returns of between 12 and 15 per cent over a 10-to20-year period.

We have to try to make investors look at the long-term story. Power of compounding should be implemented. You will enjoy the benefit only if you are disciplined and invest systematically for the long-term. People can reflect on investments such as property where simply by staying invested after making a good choice in the beginning, you really reap the rewards after 10, 20, 30 years. The same lesson should be applied to equity investing.

Article E-Mail :: Comment :: Syndication :: Printer Friendly Page