The turbulence the capital markets have been witnessing in the past four years has left many investors poorer, even mutual fund investors. Because of this, the search for capable fund managers who apart from generating wealth would help limit losses during prolonged market downturn has assumed greater importance.
The question of asset diversification has been discussed by market experts on numerous occasions to spread the risk and along with it also comes the advice to spread the MF investment among different fund houses.
Focus on stocks
While there is merit in the argument, it is not that trying to restrict investments to one or two fund houses for a portfolio of different investment schemes — large-, small-, mid-cap, balanced and debt funds, etc, – is a risky misadventure. What is important is the investment acumen of the fund managers.
Constrained by the scheme mandates, fund managers focus on a limited universe of stocks. Hence, even if one invests across different fund houses for diversification or to limit risk, there will be overlapping of portfolios in the same type of schemes among different MFs.
In a chat with Business Line, S. Karthikeyan, Professor — Finance, Jansons School of Business, Coimbatore, and Director, Coimbatore Capital Ltd, said “risk is an essential element in investing (and) dealing with risk is essential.”
Relative factor risk
Diversification is to reduce the risk and investing in diversified fund portfolios again is likely to reduce the risk further. But along with reduced risk, the return also gets reduced! He felt that “aiming better return by attempting complete diversification is superstition.”
When the money was deployed in funds with varied investment styles (managers’ style) there will be a ‘lot of dissonance' among the portfolios held, affecting performance. He said, while risk control helped avoid loss, risk avoidance was likely to lead to ‘return avoidance as well’. Karthikeyan, commenting on the risk of sticking to one or two fund houses even if their funds are better performing, said investors were of the view that the performance of a fund was ‘a relative factor to who manages it’ and when there was a change of guard, investors review their decision about staying invested.
Terming this as ‘incorrect’, he said ‘no one can predict future precisely’.
He said it was because of this factor he held the view that if a fund offered excellent return during a period it did not mean ‘the portfolio has got no risk or the fund manager is excellent’. Investors must also track the investment pattern/ portfolio and take appropriate decisions.
Karthikeyan said “it is not the asset classes but the style of the fund manager that brought superior returns. But risk control was essential in good times since it may turn into bad at any moment. He felt that “controlling risk efficiently only makes the difference in the returns.” On the whether the days of star fund managers were over, given the mixed performance of the funds in recent years, he said “there is no guarantee that because managers have done well in the past they (will) continue to do (so) in the future also.” To a limited extent this is possible. Valid approaches work some time but not all the time. If it was possible then “investment can be reduced into an algorithm and loaded on to a computer!”
He said “looking back, the past 10 years (speedy growth phase), and judging is also improper. The next ten years will only prove whether there can be a case for real star fund managers in India.”
Investors must track the investment pattern/ portfolio and take appropriate decisions. — S. Karthikeyan, Director, Coimbatore Capital Ltd