It is okay for mutual funds to invest in new-age companies, even with a loss, says Sapna Narang of Capital League

Sapna Narang, Managing Partner, Capital League.

Sapna Narang is among the rare women in money management in India, a space that has traditionally been dominated by men. She founded Capital League, a Gurugram-based boutique wealth management firm, in 2003. Two others, Vinita Idnani and Rajul Kothari, joined her as partners in later years.

Capital League is unique because it is entirely run by women; all of its staff are women. That was not intentional when they launched the firm, Narang says. In fact, there was a male employee at the firm’s inception stage who left soon thereafter. In its annual reviews, some women expressed happiness at working at a women-oriented firm because they felt comfortable sharing and confiding with one another. “We thought perhaps there was some merit in looking at a workplace this way because a workplace has to be much more than just a place where you do business,” she said.

However, Narang and her team have always kept a keen eye on business. Twenty years later (today, that is), the firm is one of the largest mutual fund distributors and advisory firms in India. It manages assets worth Rs 1,573.46 crore (as of March 2023), as per the Prime database.

Should you jump in when markets correct?

Having started before the great Indian bull run began in 2004, Narang would ride many market cycles. That is one reason why she says investors must focus on risks and not just returns.

She said that if an investor has split the investments in equities and debt at 50:50 and if equity markets fall sharply, the investor mustn’t increase the equity allocation to, say, 75 percent. When markets fall later, such investors panic. “The panic that builds up is so high, therefore, that they would, then, just want to get out of the equity markets,” said Narang. This is the same way in which some investors invest as much as 30 percent of their corpus in just one equity fund, on the back of its superlative past performance, she said.

Also read: How asset allocation helps you reach your financial goals

According to Narang, there are some 70-year-old investors who have 80 percent of their corpus in equity, while some 40-year-olds prefer to park 80 percent in fixed-income investments. “Whatever your risk profile is, stay true to that instead of following the market,” she advised.

Ease of investing and the rush of Gen-Z: a two-sided coin

Narang believes that one of the most significant events that has happened in the world of investments is the increasing digitisation. Post-COVID-19, investors, especially the younger generation, have opened demat and share trading accounts. Data shows that the number of demat accounts jumped from four crore at the start of the year 2020 to five crore by the end of 2020 and 8.1 crore a year later. At the end of September 2023, there were 12.95 crore demat accounts in India. “It took the (capital markets) regulator (Securities and Exchange Board of India, or SEBI) to point out that nearly 80-90 percent of investors make losses in futures & options (F&O). Normally, the regulator does not comment on a single product category,” she said.

Secondly, equity markets recovered sharply after the initial setback of COVID-19, and many people made easy money. Narang said that most investors who entered the equity markets for the first time during and after the COVID-19 period haven’t yet seen a market crash. “So much money has moved into the mid- and small-cap space in the last nine months itself,” said Narang, pointing out that even fund managers are warning investors about investing in small- and mid-cap funds.

The NFO rush and how to choose

With a plethora of new fund offers (NFOs), should investors invest in them? This year, so far, mutual funds have launched 101 new schemes. They have collected a total of Rs 28,406 crore, as per Value Research. Sixty-eight of them are index funds or exchange-traded funds (ETFs) that track various indices, including thematic ones.

Narang doesn’t recommend investing in NFOs. “There are plenty of existing schemes to choose from. You don’t need to get into a fund that has just been launched,” she said. Narang’s formula to choose funds: ignore all funds less than Rs 500 crore of corpus and don’t have a three-year track record.

Mutual funds and new-age companies

In the past few years, mutual funds have come under criticism for investing in new-age or start-up companies. In the recently listed Mamaearth IPO, seven mutual funds, through a total of 19 schemes, invested around Rs 250 crore in the anchor allocation round of the IPO. Although the collectively invested exposure of mutual fund houses in Honasa Consumer (which operates under the brand Mamaearth), as per the anchor round, stood at less than 3 percent, some industry observers believe that mutual funds should stay away from IPOs of loss-making companies.

Narang doesn’t agree with this criticism. “Mutual funds have a certain structure in place where investment ideas are vetted by an internal and expert committee. If a scrip has been picked up, it has obviously gone through a filtration process,” she said. As an advisor, Narang does not recommend direct equities but prefers equity mutual funds instead. “Information is a commodity, and certain fund managers who are consistently able to beat the index have a better ability to understand (companies and the share price trajectories), rather than us trying to evaluate it,” says Narang.

Can I afford to retire early?

Many Gen-Zs and millennials aspire to retire early, preferably by the time they turn 50. Long commutes, gruelling work hours in their early stages of careers, rising incomes, and employee stock options (ESOPs) are some of the reasons why these young workers have taken a fancy to concepts like Financial Independence, Retire Early (FIRE). Some financial planners say the concept of early retirement is a myth and that people do not think it through carefully, especially how they would spend their time in their retirement years.

Narang looks at early retirement from a slightly different angle: the lifestyle in retired years. She believes that the corpus you need to have in retirement should be enough to support your lifestyle. “Early retirement is not about how much you’ve earned so far or what your retirement corpus is. The question is: How much do you want to spend?" said Narang. You could have a seemingly large corpus by the time you turn 50 and feel that you are ready to retire. But this would, typically, be less than for someone who chooses to work until the age of 60. Narang said that early retirement is a legitimate goal, but you need to figure out if that’s enough for the kind of expenses and lifestyle choices you wish to make after retirement.