Investors should seriously tone down their expectations for 2024: Radhika Gupta

While suggesting that incremental money should now move to largecaps, Gupta at the same time believes that investors shouldn’t completely ignore mid and smallcaps while building a portfolio for the future.

The one thing that scares Radhika Gupta, Managing Director (MD) and Chief Executive Officer (CEO) of Edelweiss Mutual Fund, is the superlative performance across assets classes in 2023. “People should moderate their portfolios for 2024,” says the head of India’s 13th biggest asset management company (AMC), explaining why the chances of an encore are slim.

While suggesting that incremental money should now move to largecaps, Gupta at the same time believes that investors shouldn’t completely ignore mid and smallcaps while building a portfolio for the future.

Where should one put one’s money if they have Rs 10 lakh to invest, how to reposition the portfolio for 2024 and what will be the key trends for the mutual fund industry going ahead? Radhika Gupta answers.

Also read: Mutual Funds Year-end Special 2023: 5 things that impacted how you invested in 2023

Edited excerpts:

Smallcap funds have seen around Rs 40,000 crore of inflows against Rs 2,500 crore of outflows in largecaps. What should be the strategy now?

Incremental allocation should now probably go towards multicap funds or be staggered (via systematic investment plans, or SIPs). I don't believe that you should drastically jump from small to largecaps. Investors, in doing all this jumping, end up paying a lot of taxes.

I don't believe that if you want to build a portfolio for the future, it can be only a largecap one because it's very concentrated in a few sectors. In my view, the portfolio of the future is more of a 40:30:30 (large: mid: smallcap) portfolio, i. e, multicap. Today, if I had to pitch one product, I would say it should be a multicap fund.

If somebody has Rs 10 lakh to invest, what should be the ideal allocation?

If you're a conservative investor, put a meaningful chunk of the money in a balanced advantage fund (BAF) or an aggressive hybrid fund, which are hybrid funds that invest 75 percent in equities and the rest in debt. I say this because it's a much more tax-efficient way to do equity-debt allocation.

If you’re an aggressive investor, do multicap funds. I’ve become a big fan of bundled mutual fund products, because for the consumer, the rebalancing is very efficient. Consumers do a terrible job moving, and they also pay a lot of tax.

How to reposition one’s portfolio for 2024?

I think the biggest problem in 2024 is going to be one of expectations. Because 2023 has been such a good year for equities, debt, and even gold, people's expectations have again gone out of whack. People should moderate their portfolios now. My worry with all this mid and smallcap rally, especially smallcap, is that now people are demanding microcap funds. That’s scary.

Investors should seriously tone down expectations because bad expectations lead to a worse investing experience.

Also listen: How to get the best out of smallcap funds? Simply Save

Budget 2023 (the Finance Act, specifically) shocked the mutual funds industry and unitholders by removing long-term capital gains and indexation benefits for debt funds. What has been the impact on target maturity funds or Bharat Bonds?

Obviously, inflows have come down.

A lot of money was allocated just before the tax changes were implemented on April 1. I think flows are maybe 10-15 percent of what they used to be. That is unfortunate.

Retail investors now invest this money in hybrid funds. Arbitrage funds have been a big beneficiary as the returns are similar to debt funds, but with better taxation. We launched a multi-asset fund, but that was more income focused. That, too, has been a beneficiary.

Edelweiss BAF recently crossed Rs 10,000 crore in assets. In 2023, BAFs saw an overall inflow of Rs 4,000 crore, where multi-asset funds received Rs 20,000 crore. Do you think BAFs are losing relevance to multi-asset funds?

I think multi-asset has become a bit of a fad. There was a phase when aggressive hybrids were a fad, then BAFs were a fad. I believe all hybrid products are good.

I really believe aggressive hybrids are underrated, The best portfolio, a 75:25 equity:debt portfolio, is a rock star portfolio. I don't have a view that says multi-asset or BAF is better. Multi-asset has become a little popular recently, because gold has done well. You will have a period of flat gold returns, and people will go back to saying aggressive hybrid is good.

Radhika Gupta, MD and CEO, Edelweiss Mutual Fund

Which trends do you think will shape the future of the mutual fund industry?

More asset management companies will come into the market. From 45-50 to maybe 70 AMCs by the end of this decade. As creators of asset management businesses, we have realised that this is a good business.

I think the market has become much more open to younger AMCs. A lot of the big guys have lost market share, especially in equity. You will see a lot more variety of investing styles in mutual funds. We were brought up on value versus growth styles. Now quant is a style; we run funds in the quant space. Now there’s a smart-beta style. We run momentum-oriented funds; acceptability of new investing styles will grow.

Also, in the future fund houses will be process and principles driven, rather than people-driven. We were brought up to think that there are gurus of investment.

You will see the AMC industry work more like Singapore Airlines, than a top heart surgeon. When you get a surgery, you only care about the surgeon; you rarely think about the hospital. When you fly, you only care about the airline, you don't know the name of the pilot. And in both cases, your life is at risk. Because you assume that in an airline, the institution takes care of everything. We've always wanted to be like Singapore Airlines, not a top heart surgeon, and I think the industry will go that way.

Do you think India needs more AMCs or a larger distribution network?

More AMCs is not bad for the consumer because it's more variety for investors. And I think competition keeps people on their toes. If you compare India to the US or China, we don't have a very large number of AMCs.

But India needs 10 times the distribution it has today. The power of distribution is under-rated.

There was a rumour that you were leaving Edelweiss. Has that died now?

Yes, I think so. Maybe it died because of Shark Tank (the reality TV show on start-ups, on which Gupta was one of the judges), maybe it died because the rumour has existed since July 2020. But we're in December 2023, and I'm still here.

I have consciously chosen to spend time engaging with people on social and mainstream media. For many consumer brands, social media and PR (public relations) is a very important part of their strategy. It is for us as well, but it is unconventional for the CEO of an AMC to be out there. So maybe, because we are in the news so much, people love to write about us.

One asset class that will outperform, going forward?

Equities, Indian equities.