Largecap funds are no longer relevant, better go with ETFs: Dhirendra Kumar, Value Research

Unfortunately, there is no smallcap index fund or midcap index fund or the balanced index fund, Dhirendra Kumar, CEO, Value Research, tells ET Now.

Edited excerpts:

Active versus passive investing. How should these two be treated?

Individual investors should be looking at actively managed funds. But that does not mean that index funds are not making inroads. Certain kind of funds have completely lost their relevance. They have lost the plot. Actively managed largecap funds, the large and midcap fund are unable to beat the benchmark and the reason is quite understandable. The cost of these funds are very high. Ever since Sebi mandated that everybody should be benchmarking themselves to the total return index, they are finding it very hard.

When I look at the SIP return of the largecap funds, I am not looking at point to point return. There are 71 of them and over the past five years despite doing the SIP, only 14 are able to beat the index. Over the last 10 years, of the 41 funds that exist, only 11 beat the index. So it is hard. Largecap funds have lost the ground. They are no longer relevant. If you have to invest in largecaps, consider the ETF, consider the index fund because everything being uncertain about markets and return from equity funds, only one thing is definite -- the expense. You are guaranteed to get lower expense with the index fund.


But most individual investors doing their SIP, their Rs 5000, Rs 10,000 in the multicap and balanced funds do not have that indexing option. You do not have the avenue to invest which is more conservative and allocation. I would say that indexing is making inroads. Largecaps have lost the plot. The only thing individual investors can benchmark against the Nifty is the largecap funds and that is not a fair comparison because individual investors do not have the index vehicles available for them for investing in the smallcap fund. We do not have the smallcap index fund or the midcap index fund or even the balanced index fund.

The opportunity in the Indian market for investors is in the sub-large category and mutual funds are adding value. The recent reduction on expenses might make them little interesting or impressive. Over next two-three-four years, the actively managed funds might look better because they will be forced to reduce their expenses and look competitive or it will definitely stack up in the performance number. As of now, largecap funds look ugly.

How to approach index funds against midcap funds?

I sound like a stuck record. I keep saying the same thing every few months which is somebody getting started should start with a balanced fund and balanced fund with a 10-year history of doing consistently well and a balanced fund which is truly a balanced fund in terms that the equity portfolio should be a multicap and the fixed income portfolio should be consistent, a good mix of corporate bonds and other things and so that remains, choose balanced fund if you are getting started. If you have to save for taxes, choose a multicap tax saving fund and that is it stop nowhere. If you are going to invest just Rs 1.5 lakh in a year, look no further.

For other investors, multicap is the way to go. In fact today I would just like to point to these numbers that today the index performance looks impressive and index performance looks impressive because the dominant part of the index, three-four stocks did exceptionally well in the last one year.

Mutual funds cannot really manage a portfolio like that. Actively managed funds are designed to diversify better and they cannot really take a position of 35% in four stocks the way it is actually weighted in the index. So they have their constraints. But at the same time, I would say that do not consider large caps. If you have to invest in a large cap fund, it is better to go for that ETF but for most common investors, the multicap fund, the tax saving fund or the balanced fund they still turn out to be very promising choice for their SIPs to accumulate their savings and turn it into something meaningful.

Recommendations for someone who is just dipping his feet into water.

Even in the balanced category I actually go by my choice of funds which are not necessarily the best performing on point to point return basis, something like Tata Balanced or ICICI Prudential Balanced Fund or the Balanced Advantage Fund. There are quite a few options and they have long history.

In fact, for most investors the first challenge is to invest in a manner that they can stick around for a long period and these balanced funds help you do that. If you do your SIP or even if you once in a while make some lump sum investment and continue with your SIP. If you do it in a smallcap fund or a largecap fund or a midcap fund, you will be disappointed. You will be driven out of the market because of lack of experience, not having how the whole thing works. Balanced fund help you develop patience, understand things and then thereafter after two-three years move on to a multicap fund.

Your comments on the Jan Nivesh investor awareness initiative.

It is a good start but it is not good enough. Divide an individual’s lifespan. We are faced with a great challenge. You start working when you are 20-25-years old . You work for 25-30 years if you are lucky in this rapidly changing dynamics. After that, if you are going to live for another 30 years, then theoretically, you have to save enough in your life time so that it can take care of as much life beyond retirement and just 1/30th of your income is not good enough. But it is a good start. It is good initiation because saving is not investment and this is what this initiative is doing.

But gradually investors must realise that they have to work hard, earmark more savings and it should be put to work. If you put your money in equity in early stages, then congratulations! That will be a good beginning for a lot of Indians. Demographic dividend will turn out to be a liability 20 years from now if people do not manage their personal finances well.