It has been the year of thematic mutual-funds. International funds, multi-asset, value, quant, dividend yield, sectoral, special situations, ESG schemes, and the list gets long. In debt funds, the roll-down maturity strategy is being touted as the best way to play the bond markets.
But will these themes work in the long term and should you even invest in these themes?
International funds/stocks: Buoyed by the great returns the US markets delivered in 2019, investors continued to deploy money in international funds and stocks. Buying international stocks became easy this year, with large Indian brokers and online platforms offering seamless transactions. Pretty much all mutual fund NFOs too came with international exposure. There are international funds, global stocks and domestic funds which take exposure to stocks overseas.
Which option should you choose?
You must diversify geographically for up to 15-20 percent of your portfolio. There are a variety of international funds targeting different markets such as the US, China and Europe. These funds are taxed as debt and not as equity. Evaluating foreign stocks or funds and getting information on overseas opportunities is not easy. Further, international stocks not listed in India are taxed as unlisted equity in India (Long term capital gains are applicable after 24 months and taxed at 20 percent with indexation) and the detailed ITR filing requirements make these stocks unattractive. Given these issues, it is best to go with domestic funds with international exposure.
Multi-asset Funds: Within multi-asset funds, there are funds which allocate in a balanced manner across equity, debt, gold and those with higher equity exposure. A majority have more than 65 percent equity allocation and low exposure to debt and gold, thus really not being multi-asset funds or providing the benefit of diversification.
Should you invest in Multi-asset funds?
These funds are meant for investors who are not able to apportion among asset classes. The fund chosen should be fairly balanced among asset classes and not skewed towards equity alone. This would, however, mean that it would be taxed as a debt fund.
Thematic schemes: Fund houses seem to be in a rush to complete their product offering by coming out with NFOs on themes they do not have. In the last few months, we have had ESG funds, special situations fund, value fund, quant fund, dividend yield fund and sectoral funds like healthcare oriented funds.
ESG investing has gained popularity from 2019. There are about 3000 funds overseas with $20.6 billion coming in 2019. Investors choose this theme as they are investing based on values and care about the greater societal good. The ESG strategy revolves around investing in companies that score high on three non-financial parameters - environment friendliness, social responsibility and Corporate governance.
Companies that do sustainable business have lower business risk and are likely to gain in market share and valuation. However, ESG has some issues.
-Scores can vary wildly across providers.
-Small companies with limited disclosures may earn lower scores than multinationals
Should you invest in thematic funds?
No. Themes are meant for tactical allocation and are highly risky due to the chances of the theme not playing out or being short-lived or market returns not following. Sometimes, the theme may already be overvalued. Finally, the high-conviction bets in any theme would be present in broad-based funds for the AMC and hence it is not necessary to take a concentrated exposure.
While there is increasing focus on ESG investing worldwide, the concept is at a nascent stage and unexplored and there is subjectivity involved in stock-picking. Hence, it would be better to wait and evaluate the category over the next few years to derive conviction.
Index and ETFs : Index funds and ETFs finally found widespread favour with Indian investors in 2020, so much so that fund houses started launching sectoral ETFs too.
Should you invest in Index funds/ ETFs?
Yes, but selectively.
Also read: What role do index funds have in your portfolio
Currently, most investors prefer prime indices such as the Nifty 50. They would need to diversify into other indices such as midcaps as well. And remember that while some index funds may have beaten actively managed funds, they will move in tandem with the markets. Thus, investors need to be prepared for the downside. Index funds/ETFs focussed on themes and sectors are also not recommended.
While assessing any trending theme, investors need to ask themselves:
-How does the theme fit my financial goal and investment horizon?
-Do I need to track this investment often and take tactical exit calls? If so, do I want to do this or have the time to do it?
-Is the theme too concentrated on one strategy?
The key points is you must follow sound investing trends and not just go by fads.
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