In this concluding part of the interview, Kirtan Shah, Founder of Credence Wealth Advisors, talks about cryptocurrencies, his take on Multi Cap/Flexi Cap Funds, and shares his advice for budding investors.
We have Hybrid Funds which take care of asset allocation between equity, debt, and gold. So should investors simply opt for these funds or invest separately in Large, Mid, Small, Gold, and Debt Funds? We also have Multi Cap Funds which have dedicated exposure to three segments.
Investors should have exposure to all market caps, geography, and style. In the last ten years, for five years, mid and small caps have generated the best returns. From 2011 to 21, you have one year when mid caps have done the best, and in four calendar years, small caps have done well. By looking at these past returns, one would be tempted to invest in small and mid caps without realising that small and mid caps were the worst performers in 2018. In 2018, S&P Small Cap TRI was down -23%, S&P BSE Mid Cap was down -12.53% while BSE 100 was up 3%. So each market cap performs differently every year.
It is advisable not to go for Multi Cap Funds because you are investing in a single fund, which exposes you to a single investment style of the fund manager and AMC. Rather, you can invest in Large, Mid, and Small Cap Funds across three different asset managers. This way, you get different investing styles and diversification. Having a portfolio of ten funds will not help you achieve diversification.
What about Flexi Cap Funds which have the leeway to move across market capitalisation? Will this category provide enough diversification?
Most Flexi Cap Funds are pseudo Large Cap Funds. I don’t see any Flexi Cap Fund having less than 60% exposure to Large Cap. A Large Cap Fund anyway invests 80% in large cap stocks while the remaining in mid and small cap stocks.
Some of these Flexi Cap funds have a large asset size. A fund having Rs 30,000 crore assets under management (AUM), will invest 20% in mid and small caps. How in the current Indian context of liquidity can a fund deploy Rs 6,000 crore in mid and small caps? The top three Large Cap funds have negligible exposure to small cap stocks. The largest Flexi Cap fund has zero exposure to small cap. The second-largest Flexi Cap Fund has 2% exposure to small cap stocks while the third largest Flexi Cap fund has slightly above 2% exposure to small cap. So it is advisable to invest separately in Large, Mid and Small Cap, rather than opting for Multi Cap or Flexi Cap Funds. (exposure as of April 2022)
How do Life Cycle based funds like Retirement and Children fit the portfolio as they also try to do the asset allocation based on age?
I’m not a great advocate of these funds. These funds tend to have a lock-in period. The standard deviation of Flexi Cap Funds over a three year period has been 21.50 as of April 13, 2022. In a portfolio comprising 33% each in Large, Mid and Small Cap Funds, the standard deviation is 23.50. So there is no significant change in risk when you either invest in Flexi Cap or these three categories separately.
So one can avoid such funds and rather go for separate allocation in each market cap across three AMCs and styles. Keep your portfolio simple by not adding too many funds.
People are also allocating money to cryptocurrencies. Would this be part of the portfolio when we look at asset allocation from the traditional lens?
Every asset has a use case. I don’t see a use case for cryptos. The first crypto, which is bitcoin, was meant to replace the fiat currency and allow transactions using bitcoins. It could probably take more than a decade to move away from the dollar as a reserve currency. That step started due to the Russia-Ukraine war. The actual deleveraging is happening in gold. Many central banks including China and Russia have cut down dollar reserves and have extensively added gold to their reserves. I don’t see central banks adding cryptos to their reserves.
A lot of other bitcoins like Ethereum, Cardano, and Polygon have emerged. They are allowing you to make apps on platforms that are not regulated. I think such kinds of bitcoins have a future where the use case is not replacing fiat currency. Even if you allocate 5% of your portfolio to crypto, it will not make any meaningful difference in terms of returns unless the allocation is high. Any asset in the portfolio should bring a negative co-relation with other assets. When the war happened, bitcoin fell more than equity while gold went up.
What would be your advice to the new breed of young investors who have entered the market during lockdown? How should they build their portfolios?
The kind of outsized returns we have seen in the Indian market post the pandemic is a rarity. Almost all stocks delivered good returns. So the confidence of investors was high. Investors thought they have cracked the code of how markets work. People with ten to fifteen years of investing experience are still learning how markets behave. Markets are not linear.
Don’t try to extrapolate your success in 2021 and quit your job to become a full-time trader/investor. There are many YouTubers who are trying to influence people that making a 3-4% return every month from trading is simple. Do not fall for such influencers. Your career has fuelled your investing career. If you don’t have a salary, you might not have the money to invest. Don’t make investing your career till the time you have tested your skills across market cycles and have a risk management process in place and enough savings to navigate losses.
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