As the Vice-Chairman and Managing Director of Bajaj Capital, Mr Rajiv Deep Bajaj heads one of India’s leading firms distributing financial products.

Recently in Chennai to “rebuild investor faith” in wealth creation through mutual funds, Mr Bajaj talked to Business Line on how fund flows into equity funds are shaping up in recent times and how an investor can go about selecting the right fund.

Excerpts from the interview:

Recent data on mutual fund flows shows lower inflows into equity funds. Are investors becoming more wary of investing in equity funds?

We are seeing a fundamental change in the way investors approach equity funds. They are making a shift from lumpsum investments to systematic investment plans (SIPs).

Earlier the market trend was uni-directional and people were looking to invest in equity funds and book profits at frequent intervals.

Now, the market cycle has been broken. This has meant that people have started to become more fundamental in their orientation.

They now make staggered purchases through SIPs or take the Systematic Transfer Route- park money in a liquid fund and transfer a fixed sum every month into equity funds.

As of now, nobody knows whether the stock market has bottomed out or not.

But one thing is for sure, and that is that over the next couple of years, returns could go back to between 30 to 40 per cent. We don’t see any panic on the part of investors.

But when investors see negative returns on their equity fund portfolio, aren’t they disappointed?

Nobody is happy when the returns fall like they have done. But I would say that this is a fund picker’s market. If you rank funds based on one-year returns, you will see a big divergence in returns.

The top five have positive returns of 10 to 20 per cent; there are also funds which have been neutral and those which have generated negative returns of up to 20 per cent.

Therefore, you need to be discerning. The monkey-and-dartboard approach doesn’t work any longer. It is no longer a case of just picking any equity fund and being sure that it can deliver a positive return. Selecting the right fund can only be done through a rigorous regimen.

Funds with good long term returns haven’t done well in 2008. The ones that did well in 2008 don’t necessarily have a good long term record. So which set of funds are you recommending to investors?

When we recommend funds to our clients, we take two factors into account. One, is the past performance record- for 3-month, 6- month, 1-year, 3-year and longer time frames. We give a 50 per cent weightage to this. Second, we also assign a 50 per cent weight to the fund’s current portfolio.

As we have an in-house research team, we hold house views on the outlook for the markets as well as each sector. We evaluate an equity fund’s portfolio in light of this house view.

Factors such as the cash level held by the fund are also taken into account. Though there is the view that distributors usually advise investors only to buy, we also advise our investors on when to sell funds.

Would you today recommend equity funds with a high cash position?

Not necessarily. If you look at equity fund performance in 2008, the funds which were sitting on high cash levels have not necessarily done well.

But those funds which made a timely transfer into defensive sectors such as pharma or other defensives have done well. Also, funds invested in global stocks, real estate, commodities and gold ETFs have also done better.

Are fund houses putting new fund offers on the back burner and putting greater marketing effort behind their older, established schemes?

That trend is already in place. Collections in recent NFOs have been miniscule. Fund houses have certainly realised that they cannot rely on NFOs alone to grow their asset base and are actively promoting their older funds. Today’s market conditions also ensure that funds with a track record are being favoured.

That does not mean that fresh investment ideas are being discarded. Ideas which are truly unique are being accepted- a commodity stock fund or a Latin American fund. But the investor response to old and repetitive ideas, has been negative.

SEBI had last year proposed that investors who directly invest in equity funds wouldn’t be required to pay any entry load. Has this encouraged direct investments and meant less business for distributors such as Bajaj Capital?

Initially, we did see a change in investing behaviour. There were higher walk-ins into fund offices and the share of direct investments in overall fund sales went up from 3 to 8 per cent.

But we have seen this share going back to 3 per cent. Investors have realised that they are better off going to an advisor. Market conditions have also changed considerably.

A mutual fund is not like a bank product, where there is little differentiation between one deposit and another. One good thing is, this move has also made advisers realise that they have to offer real value-addition to their investors, to justify the commission earned. If not, investors will simply go back to direct investing.

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