CNBC-TV18's initiative Informed Investors teams up with renowned financial advisers Sanjay Sinha, founder of Citrus Advisors and Gaurav Mashruwala, certified financial planner to answer the all important question: What’s the best way investors should invest their money?
Below is an edited transcript of the discussion on CNBC-TV18.
Q: The Indian economy, like all economies, is highly influenced by global forces. The mutual fund managers would be tracking the international forces very closely. But one thing is to track and another thing is to be able to hedge. There are international mutual funds also operating in India and they would be taking positions in the international market to hedge themselves. So would you consider international mutual funds as safer bet or they have more tools to control their funds?
Sinha: The act of hedging yourself does not have anything to do with the ownership of the mutual fund. It has got to do with the structure of the fund. The funds themselves are divided into different categories. There are funds, which are investing exclusively in the Indian markets and therefore there would not be using any hedging tools for the movement of currency.
Then there are some funds, which are only investing in the international markets and they do not hedge for currency also because they invest in the global markets but the net asset value (NAV) denominated in the local currency. So, you may not find an option of hedging yourself from the global movement of currency by investing in a mutual fund, which is promoted by an international entity. You may not actually get hedging for yourself by investing in a mutual fund, which is investing only in international markets.
But what you can do as an investor is: if you feel that investing only in Indian market is not going to safeguard your interest and you would like to diversify your exposure across various markets, then you can choose within your portfolio a few of the international funds, which are investing in international markets. There are some international funds, which invest in a theme or you can invest in a particular geography.
Now you have an option to invest in all the Brazil, Russia, India and China (BRIC) countries. India included there was the only missing link till now was Russia and that is also available in the mutual fund domain. You can also invest in developed markets, in US markets and so on and so forth through the mutual fund route. It is more of an act of diversification not as an act of hedging.
Q: What about an investment in span of four to five years? The money earned will be used for the higher education? What would you recommend?
Mashruwala: If the time horizon is four-five years you can make a combination of debt and equity. You can go at for the next one or two years in a mutual fund scheme, which is a larger exposure to equity, and slowing start moving into a situation, whereby year or two, prior to your requirement, it is fully into debt. So, you probably can take the asset allocation kind of funds, which has 80 percent equity and 20 percent debt or 60:40 or equal or whatever or you choose two separate schemes. You choose and equity fund and a debt fund and over a period of time keep moving money from the equity fund into debt fund.
But here the answer is more because you are saying four-five years and if the horizon is less than you want to have more into debt and if horizon is more you will have more into equity as an asset class and instrument could be a mutual fund.
Q: What is your advice on shares where companies have shut down?
Sinha: That is a tough one. I am sure in your portfolio these entities would be very few and far between. Actually, there is no recourse to a situation where the company itself has closed down. But my word of advice would be: once bitten twice shy.
When you invest in equity you should also keep a track of the companies in which you have invested because before the company shut down they must have been a lot of news items, there must have been a lot of developments. The beauty of this stock market is that at least gives you an exit at various price points. Today, you don't even have an exit. So, maybe in such a situation by some reason or the other it happens again just exit before it comes to a situation that it is shut down.
Q: Since gold prices are increasing and has increased all the way quite from Rs 9000 to Rs 30,000, what would be beneficial for the investor- buying ETF gold fund versus physical gold?
Mashruwala: If you are looking at buying gold purely from the portfolio allocation and asset creation perspective, I would encourage you to buy gold ETF. If you are buying gold to consume that is for a marriage in the family then you may buy physical gold. Otherwise buy gold ETF because 1) it is easier to store, 2) the tax implications, if you buy physical gold you have to wait for 3 years to get long-term tax benefit which is normally lesser. If it is a mutual fund, gold ETF then after a year you start getting long-term tax benefit. 3) Physical gold is subject to wealth tax while gold ETF is not subject to wealth tax. So purely, from the storage perspective as well as the taxation perspective gold ETF scores over physical gold.
Q: People use a regular jargon of short-term and long-term. In today’s context what is short-term and what is long-term? Because earlier we understood short-term and long-term differently, today I believe things have changed.
Second question is on equity markets. Inspite of the world wide economy downfall since 2008, Indian market having scams, political situations and the ground reality of inflation, we see that equity market has performed well. The market has not really collapsed or gone down back to the 9000-12000 days. What is the secret behind this? Technically, it looks artificial to a person like me but what is the reality?
Sinha: Answer to the first question on what is short and long-term. I think it is due to the cycle of the industry or the cycle of the company when you are investing. Every company, every sector goes through a cycle. Now, if you enter a particular stock and the time at which it is at the bottom of the cycle then it might take three-five years for the company to really give you full fruits of the investment. So, that would be in your opinion long-term.
However, if you enter a company, on a very strident path of growth, you might find the proportionate return from that investment come to you in a very short period of time. So the short-term and long-term definition, have nothing to do with the static definition of time in terms of the number of years. It works on the part of the cycle of the company or the sector that you enter and that defines the term for you.
As far as second issue is concerned as to why are the markets higher now even when the economy is not doing well?
You need to appreciate the fact that in this period the economy has actually grown. It is not as if it has de-grown. So, as the economy has been growing, the earnings of the market, the EPS of the market has actually been going up year by year. The EPS of the market in the financial year 2010 was up by 8 percent. In 2011 it was up by roughly 11 percent and the year after that it is up by 12 percent.
So, if the EPS of the market has been growing then of course the price of the market will also grow. So, in the last three years even though the economy has not been doing as expected, it has at least grown and the EPS of the market has also grown and that is why the markets are higher.
At the same time, much of the rally that we have seen in the current calendar year is also influenced by the fact that we have a very strong inflow of FII money. Maybe if this money was more staggered, the rise in the market would have been more gradual but you cannot say that the entire rise of the market is artificial. There is some substance to that.
Q: I have just started off with my business. How should I go about with it; should I go for 100 percent investment in my business or with some mutual funds? How do I bifurcate my investment that I have with me to start off with?
Should I go with some Fixed Deposits or government bonds? What is a safer option for me to invest, since I am just a start-up, so that I don’t end up losing the money I need for my business?
Mashruwala: Each doctor will have different prescription. Here, being an entrepreneur you are young and if you believe in what you are doing, put all your money in to the occupation that you are starting. You may not want to do that for the rest of you life, but at this point of time I will not encourage you to look at some kind of security from returns and that too in a debt instrument.
You ensure that you have enough contingency fund and certain amount of money (kept aside) for emergency. You have enough health insurance, you are debt free so there are no loans. Once those things are taken care of I would encourage you to put all your money in what you believe in.
Your second question, should you do FD or bond. If it is an FD or bond more to do with the perspective of keeping contingency fund, FD works better because bond may not be that much liquid. The cover of these bonds do get listed, most of them get traded. If the quantum is not too large, I am not sure if you could get easy liquidity. Then, I would encourage you to look at fixed deposit which in need is easily breakable.
Q: What about the investment in power sector?
Sinha: Power as a sector is governed by a regulated return. This is because of the limitation, you may not find super normal returns coming from that sector unless there is a massive expansion and that ends up boosting the revenue and the profits of that company. But also, this very reason ends it becoming a very stable sector in a volatile market. So, you can have this sector as a defensive part of your portfolio. It cannot be too growing or a multi bagger component of your portfolio.
Q: I am a retired person and want to invest in mutual funds, which fund do you recommend to invest for five years?
Mashruwala: Why five years? What is going to happen after five years? There has to be some reason behind. What is the thought process because if you tell me five years I would probably advise a mutual fund scheme which has a combination of debt and equity with slightly larger exposure to equity and lesser exposure to debt.
But, if after five years you are going to have say another three years, then eight years go 100 percent equity. So, the answers will keep changing based on your time horizon. So, if there is any event that is going to happen or some responsibility of your children then you probably ought to be clearer with what is your actual time horizon.
You will also have to monitor and this time horizon may get modified. But for five years, pick up a mutual fund scheme which is predominantly equity so 65-70 percent of the balance fund would have that. Or choose two separate schemes and in a given time frame keep tapering down the equity component in the mutual fund or change the scheme or keep liquidating money and increase your debt component. It would be ideal to find out the event which will happen after five years rather than saying five years.