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Want to time the market? Even Tendulkar faced 30,000 balls to score 16,000 runs: Manish Mehta

Author: Kumar Shankar Roy/Wednesday, January 9, 2019/Categories: The Finapolis Conversation

Want to time the market? Even Tendulkar faced 30,000 balls to score 16,000 runs: Manish Mehta

2019 promises to be a volatile year. But, volatility is what drives returns. For most investors, volatility is a scary word. With markets going up and down for quite some time now, many investors, especially ones who are new to markets, are caught in a bind. Should they continue to invest? Should they take a step back and just observe? Timing the market consistently is impossible, says Manish Mehta, national head sales, and distribution alliances, Kotak Mahindra AMC. He cites the example of Sachin Tendulkar, one of the all-time greatest batsmen. Sachin scored almost 16,000 runs in 200 tests by facing around 30,000 balls. The time in the pitch for somebody even as great as him was very important too. In an interview with Kumar Shankar Roy, Manish talks about the common mistakes Indian investors make, why investors adopt different approaches to physical health and financial health, and how sticking to a plan is as important as selecting the right investment product. With over two decades of experience in financial markets, Manish is a domain expert in sales and distribution of fixed income securities and mutual funds to institutional clients and intermediaries. Prior to joining Kotak, Manish held senior roles at AIG Investments, InvestSmart India Limited, and the National Stock Exchange.

Many investors who want to invest today are looking at events like elections. Should they worry or ignore the noise?

One thing which I would like to highlight to a potential investor is when they make an investment they always do it keeping some future goals in mind. It is never a short-term intention. In case someone has money that they want to keep for a very short duration of time, there are definitely products available to suit their needs. But, if someone is saying I am investing with achieving a certain goal that is 5 or 10 years ahead like kid's education and marriage, the rules of asset allocation and financial planning say that it is important that you stay true to the goal. Continue to keep investing. Historically and there are a lot of data points which show that whenever there is a bout of volatility, over the long term the returns have been good. I have read an analysis that if someone had started an SIP 5 years back, the first two years the SIP was negative. If you still continued to invest, over 5 years the same SIP would have given a CAGR (Compound Annual Growth Rate) of 20 per cent. 

There are studies that show an investor’s return never matches the market return. Why? The investor either is getting in too late or getting out too early. The investor is not riding the whole wave. When you have genuinely decided that your investment is for a goal and this goal would have to be reached over a long period of time, it is important to stick to your plan. 

Do you think that very regular monitoring of investments and easily available information about returns may be making investors too short-term oriented? Maybe they are reacting to small ups and dows?

If I were to use an analogy, let us assume I have a fever and I have gone to the doctor. After a thorough check-up, the doctor has prescribed a certain medicine. I have been given medicine in a proper dose that I have to take it over 4-5 days. In this situation, it is not necessary that the first tablet you pop in is going to bring down your fever the very next moment. There is a high chance that the fever will stay for the first two days and possibly by the third or fourth day, the fever will start coming down after the medicine starts showing some action. Now, if I am checking my body temperature every moment and that is showing my fever is not coming down, it does not mean the doctor is bad or the medicine is wrong. In this situation, we tell ourselves that we will be alright and we also don’t stop taking the medicine.

When it comes to physical health, people show the right behaviour. But why do they behave differently when it comes to financial health?

One of the probable reasons for this difference in behaviour could be that many investors are probably experiencing mutual funds and SIPs for the first time. The awareness levels and industry growth that you see are just a 4-5 year old phenomena. At Rs 24 lakh crore industry size and little less than 8 crore folios, the number of unique investors is less than 2 crores. Only a small proportion of investors has been MF investors for a reasonable period of time and has seen market cycles. For someone who is coming in the last 3-4 years, they have not even experienced one full investment cycle. From 2014 to now, it is only the last 12 months since January that we have seen volatility. 

Many investors stop their Systematic Investment Plans (SIP) or suspend it at the first sign of volatility. But isn’t SIP route designed to make the best out of volatility i.e. buy when markets are down?

In the last two years if anyone has done SIPs, they have been buying units at a higher NAV because the market was rising. Now, you are getting an opportunity to invest at lower values because of volatility. That is where the entire objective of rupee-cost averaging comes. When people buy direct equities, they always go and buy the stock once it corrects. The tendency to ‘average’ is very high. So, why would you not do the same when it comes to mutual fund SIP, which is a far more efficient way of investing in equities?

As volatility rises, experts are increasingly talking about asset allocation. But, doing asset allocation is a tough job for retail investors. Do fund-houses offer products that do the entire asset allocation job on their own?

One category of products that have seen a lot of interest is dynamic asset allocation funds i.e. balanced advantage schemes. This product effectively does the job of what an investor is supposed to do. Most products are based on models and parameters. They use Price to Earnings (P/E) and thus decide how much of the money of the fund will be in equities/stocks. If you look at the last 4-5 months data, most asset allocation funds' equity component has moved from 37-38 per cent to 44-45 per cent and back to 40-41 per cent. This kind of products has been able to capture the volatility of the market. The best part is that the model tells you how much equity allocation is to be done. So, there is no emotion-driven decision making. It is a hands-free investing experience. Also, such funds also give you taxation edge since they are treated like pure equity funds. Dynamic asset allocation funds are suited for a first-timer, a market-timer and also a regular investor. 

You talked about market timing. Unfortunately, many investors still like doing that. But fund-houses always tell us that consistently timing the market is impossible. What is the reason behind saying so?

India is a unique market. Investors need to have skin in the game at all times. You will never be able to catch that perfect time. If you take the example of Sachin Tendulkar, one of the all-time greatest batsman, then you will realise that he scored almost 16,000 runs in 200 tests by facing around 30,000 balls. The time in the pitch for somebody even as great as him was very important too. Similarly, investors need to spend time in the market. From the inception of the index till 2005-06, there were some 5,800 days. In this period, on some days the returns were great. On some days the returns were good. On some days, the returns were bad. In this period, there were 52-56 days which gave full returns of the market. So, if you were not there is those 52-56 days, you would have lost your complete returns from equities. We don’t know when those days will happen. So, it is important to be invested in for the long-term. 

Many investors are confused about which fund to select even when they know their investment horizon. Can you tell us which funds to pick according to available time horizon?    

On the fixed income/debt side, there are various products that fit customer’s varied need. You can invest in a money market or liquid fund if your needs are very short-term which could be 7-10 days to 1-2 months also. If somebody has 6 months to 12 months at their disposal, an arbitrage fund is a good category to invest in because it gives a tax edge compared to FDs. If someone says they have more than 3 years, obviously equity is a good place to be in. But there are options on the long-term fixed income space too. For example, you have credit opportunities funds. 

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