Capitalmind’s Deepak Shenoy on why cash isn’t king & this is the best time to stay invested

Deepak Shenoy, Founder and CEO of Capitalmind Financial Services.

At a time when concerns are rising over elevated market valuations, Deepak Shenoy, Founder and CEO of Capitalmind Financial Services, says that sitting on cash while equities continue to go higher is a bigger risk, which he doesn’t want to take at this point in time.

An investment management firm based in Bengaluru, Capitalmind recently received in-principle approval from the Securities and Exchange Board of India (SEBI) to launch a new mutual fund (MF).

In an interview with Moneycontrol, Shenoy said that he holds “next to nothing” in cash and is very comfortable with the current market levels.

What drives Shenoy’s conviction that this is the best time to be in the markets? “If the consensus is that the market is going to fall, it doesn't look like it's going to. Since the start of the year, there have been predictions of a bear market,” he asserted.

Also read | Arbitrage funds: Is the market giving signs to slow your investments?

On the contrary, the Sensex has risen around 16 percent on a year-to-date basis. Further, small and midcap indices have surged more than 30 percent each during this period.

Data shows that the Nifty 50 price-to-earnings (PE) ratio is hovering near its long-term averages, while the PE of mid and smallcap packs are above their long-term averages.

“There could be a bear market at some point. But what if the market doubles before that? That's why we follow a rule that we don’t predict, we respond,” he said.

Shenoy shared that he will start thinking about cash allocation if and when the market falls 10 percent. “At 20 percent, we will look to operate on the cash front.”

The founder of Capitalmind revealed that he does hold some cash as fresh money is flowing in from investors, however, that will be deployed very soon.

Shenoy’s stand is in contrast with that of some other asset management companies (AMCs), which have been witnessing rising cash allocations over the past three months.

The information available with the Prime Mutual Fund Database shows that the average cash holding of the mutual fund industry stood at 5.51 percent as of end August, up from 4.78 percent in July and  4.36 percent as of June end.

Also read | These small-cap stocks that MFs love generate significant revenue from exports

“Some big names in the industry have 15-20 percent cash. They are underperforming the market. If the market goes up 10 percent, they will lag. But when the market falls 10 percent, they also fall, because you still have 80-85 percent in stocks. Taking a cash call is very difficult,” he said.

According to Shenoy, such calls should be taken when the market has fallen, or is falling instead of going up.

Shenoy, however, has a warning for investors. “I am willing to take a 30 percent loss. I tell my customers on day 1 that you should assume markets may fall 30 percent or more. If you can't take that kind of risk, then don't give me money.”

Capitalmind Financial Services runs four portfolio management service (PMS) strategies — Adaptive Momentum, Resilient, Surge India, and the Market Fund — and had a total AUM (assets under management) of Rs 2,267 crore as of August end.

In terms of comfort with sectoral allocations, Shenoy thinks that companies in the defence, manufacturing, railways, infrastructure, domestic consumption, and financialisation spaces are not heavily valued.

On euphoria in the SME (small and medium enterprise) space, Shenoy believes that some companies are worth a lot more than they are currently. “In those cases, it may not even be euphoria. It may be just a prelude to the future,” he said.

Shenoy, meanwhile, highlighted that euphoria might apply to the main board as well. “Jet Airways traded for three years even after it died. So, people trade zombie companies all the time. People trade without really knowing what they are buying and selling, whether it's an SME or otherwise,” he explained.

Also read | Spot the tell-tale signs of investment scams and know how to avoid them

Apropos charges of manipulation in the SME space, Shenoy said that he doesn’t invest in that domain and that enforcement levels are very low against badly behaved promoters. “Hopefully, that will change,” he added.