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Dhirendra Kumar picks the best funds for retirees

In an interview with ET Now, Dhirendra Kumar , CEO, Value Re..

In an interview with ET Now, Dhirendra Kumar , CEO, Value Research , points out that equity income funds and even balanced funds could be good for retirees. His favourites are HDFC Equity Savings, ICICI Prudential Equity Income and Reliance Equity Saving Fund.

Edited excerpts:

Let us start with the young and the restless people who are willing to put risky bets into the markets and put their money on small and midcaps. In 2018, where should they be putting their money? If an investor has decided that he is willing to take a downside in the interim and want to maximise his return, midcap and the small cap funds are the way to go. But one has to be a little careful because here we have a choice and a range of return. The return that you derive from the best mid or small cap funds and the worst mid and small cap funds can be very wide and so one has to be little careful. The investor should consider this one rule: being an accumulative vehicle, a regular investor actually benefits because you are able to get the average and even if you have sizable amount of money to invest, you should spread it over a period of time. Consider your options in the small and midcap fund. If I have to choose some, then I would say the principal emerging bluechip fund looks very promising. It is a very high quality fundamentally guided portfolio. So, that is one. The SBI midcap fund which is focussed on turnaround situations and some structural growth stories is another that looks very promising. The third one which comes to mind is L&T midcap. This has been one of the most consistent ones and also is largely tilted to midcap but always had a big exposure in small caps.

What is the second category that one should be investing in? Even if you are excited by the market and feel that you have missed the bus, you have to resist the idea of jumping on without a thought as that could turn out to be very injurious. Broadly the investor should be guided. All the categories which we are mentioning are fine for cautiously optimistic or aggressive investors or the young and restless but you have to really experience the market and understand how important money is in your overall scheme of things. Think of these before investing your long-term money.

The cautiously optimistic investor should consider the large-caps. Here my choice includes ICICI Prudential Focussed Bluechip, Motilal Oswal Focused 25 – it is not a relatively young fund but has done exceedingly well and looks most promising. It is not hugging the benchmark at all and limits its portfolio to only 25 stocks. Mirae Asset India Opportunity is a stellar performer and the most consistent.

What about those who want to play it safe those who want the best of both worlds? They want their exposure to equities but they want to balance it out with some debt exposure as well. Looking at balanced funds, what should they be doing next year? Most investors need even the other two categories which I have mentioned. If they are investing for the first time, they should always start with a balanced fund and the coming year also is going to materially more rewarding for the balanced fund investor because the rebalancing that happens in balanced funds and the extreme volatility that we have seen in the interim and the rebalancing will translate into superior returns.

We have had a phase of market where balanced funds were able to beat even the multicap funds and the large cap funds and those periods have been fairly prolonged. That apart, it is a steady take on growth. So, consider balanced funds. Most investor needs get fulfilled by this. My selection here includes Aditya Birla Sun Life 95 among the oldest, most consistent and fairly predictable equity portfolio, HDFC Balanced Great Returns, and it has been very different from the pack of HDFC Equity Funds which has struggled. ICICI Prudential Balanced is again a very conservative portfolio and over a three-year time period it beats all others.

As much as we may be celebrating the DII participation figures, the fact is mutual fund inflows are at an all–time high. There is still a very large section of the retail population that believes that stocks are risky. What if someone is just looking to play it safe? What should someone be looking at if he wants very predictable investment ideas and does not want to invest in stocks at all? India has largely been a fixed income country. Investors love that and fixed income funds can actually fulfil the needs of the people who are short-term investors. If you are investing for three years and less, you should consider this. These will and be very conservative. Do not try to optimise your return or maximise your return on fixed income funds because these investors whenever they face a decline, it turns out to be extremely painful and very difficult for them to reconcile with the 2-3% decline, as we are witnessing right now.

Many investors bet with the dynamic bond funds which are very disappointing. So be extremely conservative with this and my selection includes the short-term and the ultra short-term bond funds for parking your money which you need in the medium term Aditya Birla Sun Life Treasury Optimiser Fund, DHFL Pramerica Medium Term Income Fund and HDFC Medium Term Opportunities Fund. These funds have given outstanding return of a little over 10% in the last one year. Do not expect that, it will be a little lower but the downside is completely guarded. You will not get a bad surprise and if you turn out to be an investor of three years and more, the tax efficiency will kick in as all the gains will be treated as capital gains and you will derive the great advantage vis-a-vis a deposit.

Let's go through categories once again. The young and the restless, who are let us say taking a plunge mid-cap funds, what should be the return expectation and risk in percentage terms? I do not know about the percentage but this category turns out to be the most rewarding and if you look at the past, it beats the benchmark by twice as much. If you are optimistic about the market, the averaging will actually optimise your returns further. The risk if you are investing for the next five years in a mid-cap fund in say two years down the line, you can even see a 60% decline in a month's time and it happens quite often. If I recall, in 2008, the 70% decline in the small cap fund was quite stomach churning. Of course, I do not anticipate a 2008 — the convergence of all the bad news and a great coincidence where everything happened at the same time — but be prepared for that. The only way to benefit from that is to be a regular investor and never invest lump sum.

But if one is looking at picking out a particular kind of funds for 2018, while mutual funds of course should be an instrument wherein you every month put in money — and not in lump sum — for at least 5-10 years, that is an ideal scenario. But if in the more short-term, one is looking at the next say one year, would fixed income funds is a safer bet or would you say equities will continue to make more money? Equity is not correcting and many investors have lost the opportunity by waiting endlessly but if you have only one year, then equity is ruled out. Generally speaking, I am still optimistic about equity and one has to be careful with the kind of funds you invest in because now we will start witnessing the laggards and the winners because so far even the poor funds have done reasonably well over the last three-four years.

What should one do because the retirees are frankly feeling the heat which could be considered huge because saving rates have come down? Yes, this is one thing which is actually contributing to the markets' growth and the flow as well. For them, it is a necessity. I do not think it is a matter of choice for retirees to avoid equity because if you look at the decline in interest rates, it looks like 1-1.5-2% but interest rate is coming down from 9 to 7%. For them, it effectively translates into a 30% decline in their income. That is substantial and very hard to reconcile and reset their income needs. Rretirees have a very definite need that there should be income and income based on that capital should be inflation adjusted, meaning with rising costs, it should grow and the only way to do it is have meaningful exposure in equity.

At the same time, your appetite for the volatility will be low. If you cannot really be investing in the small and mid-caps where you see a blow up of 50% for one year and that is the time you are pulling out and eating your capital. The drawdown can actually be a devastating thing for retirees. For them, the simplest way is to consider the equity income funds. Nearly a third of it is in equity, a third of it is in high yielding fixed income and a third of it is in arbitrage and that gives it the character of an equity fund. The tax treatment is like that of an equity fund and it is substantially low on risk. So, this is one simple option.

Even the balanced fund that I mentioned, if you invest in a balanced fund and keep your annual withdrawal rate to 5%, then a balanced fund can also meet your income needs and in a manner that you will be able to increase your income with inflation. It will get inflation adjusted more meaningfully. For conservative investors, the equity income fund and here are the ones I like; HDFC Equity Savings, ICICI Prudential Equity Income and Reliance Equity Saving Fund.

As we wind down, it is important to look at who has got this year and who has not got this year right. Give us an evergreen fund manager, someone who has really got 2017 right? Who would that be — Prashant whose contra bets finally paid off or somebody like Raamdeo whose has been evergreen with earnings and is giving consistent returns?
I will clearly choose Raamdeo because he actually reflects clarity and did not get distracted. So has been Prashant but it still has to gain ground. Of course, he recovered whole year in few days but we still have to really build up. We have to see how things happen and his orientation. It cannot be measured and you really cannot pass a judgement based on a calendar year.

On the fixed income side, it has been a year where you made money by first betting on the long end, then on the short end. So, it has been tricky year for fixed income fund managers also.
Yes. Fixed income fund managers had the toughest time because everybody waited for the rate cut which did not happen. It happened when not too many people were expecting. Then we had the credit blow up which was actually a turning point in the industry for the mutual fund investor and the calamity we saw in the decline of the credit opportunity fund and the surprises that we got despite their quality orientation. What we witnessed was that a small blow up in fund can drive investors to pull out which in turn can drag a fund company. It has been a very tough year and if you look at the returns of the dynamic bond funds, you find who all went wrong. Many investors are questioning are they really worth it? The return from these funds is lower than the expense that you incur.

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