‘Short-term volatility is a friend of the long-term investor’
Investors shouldn’t focus too much on the short term and ignore the negative noises, says SUNIL SUBRAMANIAM, managing director, Sundaram Mutual Fund. In conversation with Samie Modak, Subramaniam says investors who have continued with systematic investment approach will benefit in the long run. Edited excerpts:
Is the recent moderation in flows a cause for concern?
Lump sum flows have come down over a period of time. The net inflow tally looks alarming due to high redemptions. The reason for redemptions could be multifold. A large part of the recent redemptions is due to active management by investors. This is in a sense hot money. Once things turn around, that money will come back. Also, you have to remember the recent moderation is happening due to the base effect.
The industry garnered inflows of more than ~2 trillion in the past two years. To expect the same run rate is unfair.
Is the spike in volatility making it challenging for fund managers?
From a mutual fund perspective, it is actually good if markets are volatile. When markets are booming, fund managers get panicky, as investors come in with a lot of expectations after most of the run-up has already played out. Over the next three years, investors, who would have bought through the entire volatile phase, will benefit. However, in the short run, there is a lot of focus on negative returns.
What would be your advice to someone looking to invest now?
Systematic allocation is better than committing a lump sum, as the markets are inherently volatile. The second aspect is the belief in India’s growth story. I think over the next two decades, India is going to be the next China. It will be a foreign flow magnet. So inherently the valuations will go up. Therefore, the short-term volatility is a friend of the long-term investor. So I’d encourage everyone to ignore the near-term noise. One can also adopt a contra approach to investing. People usually run away from volatility. Most fund managers deliver value by being contra. However, one has to be careful about corporate governance. You shouldn’t be contra by investing in a company with poor governance or negative cash flows.
Actively-managed funds are finding it tough to beat their benchmarks. Where are you on the active versus passive debate?
Institutional money and wealthy investors are increasingly looking at passive schemes, especially in the large-cap space. The reason why so many exchange-traded funds (ETFS) have outperformed is that the fund managers got the call on Reliance Industries wrong. Most missed out on the huge rally which started from 2017. This left many investors disappointed. They said despite giving fund management fees to the asset manager, they are not able to beat the index. So I might as well put money in passive. Going ahead, diversified large-cap schemes will find it increasingly difficult to beat the benchmarks. This could lead to more flows into ETFS. So that’s the definite trend and direction in the large-cap category at least. But in the mid-cap and small-cap category, alpha generation will still continue.
How much time will it take for economic growth to improve?
The recovery process will be prolonged. The reason I am saying that is the government is not responding by providing quick-fix to consumption slowdown. All the recent steps, such as corporation tax cut, easing of foreign direct investment norms, and releasing money into the banking systems are aimed at increasing fresh investment. The real impact will be seen over a period of time.
How much return can one expect next year?
Market returns are difficult to predict. However, as investors see green shoots, the markets start going up. Investors don’t wait for actual recovery to take place. Equity markets will not be challenged to deliver high returns. High single-digit returns will be looked at positively, as bank rates have been coming down.