SUMMARY
But I think if investors keep a long-term view and consistently invest, they will definitely see returns. If you pick the right sector, even the worst-performing stock in that sector can still outperform the best-performing stock in the worst-performing sector. Now, if your entry point is very expensive valuation-wise, it means your future returns might be limited. But if your entry point valuation is reasonable, or cheap, then it means your...
Future returns can be really good. You're totally on point. Before the impact of compounding kicks in, consistency in investing usually breaks down. Now, if you're an engineer, focus on your engineering skills. If you're a doctor, focus on that, and leave the investing part to someone else. What happens then? Everyone sticks to their core strength, and that pays off. Hello and welcome to all of you to our brand-new podcast, The Smart Money Show. Today, we're going to talk about flexi cap funds, and we're going to cover everything about them.
Let's take a close look at what exactly this construct is, which types of investors it’s relevant for, what things we need to keep in mind, what risks might be involved, and how it performs when the market goes up and down. To shed light on this today and give us some in-depth knowledge, we have Mr. Amay Sathe with us, who is a fund manager at Tata Mutual Fund. Abhay, welcome, and I hope you’ll share your experience and insights managing such a large fund.
You’ll explain this to our audience in a very simple way, and the benefit we want to take from this is that there are so many mutual funds out there—it’s like a jungle. Multicap, flexicap, small cap, contra funds, focused funds. Among these, flexicap funds. So, let’s start by understanding what exactly flexicap funds are, how they’re structured. And along with that, to begin with, I’d like you to share your experience and journey with our audience.
The mutual fund industry has started, so if you could start by telling us about it, then we’ll move on to what exactly flexi funds are. First of all, thank you for inviting me to this session. So, a little background about myself—I’ve been with Tata for the last 10 years, and my total work experience is around 18 years, actually more than 18 now. I joined Tata as an analyst, and for the last six years, I’ve been managing funds at Tata Mutual Fund. Currently, I manage the Tata Flexicap Fund, Tata Banking Fund, and we also have a Children’s Fund.
It's also a really interesting category, so this is basically a quick background about myself. I did my MBA and my CFA from the USA. So either you were interested in coming into the mutual fund industry from the start, or it just happened, or something like that. Before Tata Mutual Fund, I used to work on the broking side. There, my job was to research a lot of companies. Obviously, that part was pretty interesting because you get to meet so many great companies, great management teams, and do a lot of in-depth research.
It’s required. And when you come to the buy side, like with Tata Mutual Fund, there’s an extra element that comes into play—valuation, meaning how you actually behave. Like, when there’s euphoria in the market, how do you react? And when there’s a lot of negativity, how do you respond? This is an additional element in investment management that wasn’t really a part of the early role. And honestly, that’s the most exciting part in my opinion. Because nowadays, everyone has access to information. The data we get is also available to our competition. Everyone has it today.
Time management access, expert access, everyone has more or less similar access. So, no one really owns it. I think what really matters is your behavior. And if you're managing your behavior well, then I believe your overall performance will be pretty good. Wow, interesting. So, let's move ahead. Absolutely. Amey ji, please tell our audience what exactly are flexi-cap funds in the overall scheme of things? And if you could start by explaining how many types of mutual funds there are.
Sure. So, what exactly are flexi cap funds? And where do they fit in terms of risk profile or maybe market cap? Definitely. As the name suggests, flexi cap means the fund manager has flexibility. There’s no strict rule about what market cap the fund should have. For example, in a large-cap fund, 80% of the fund has to be in large-cap stocks defined by market value. Similarly, there are such constraints in mid-cap and small-cap funds as well.
Yeah. Even in multi-cap funds, there’s a constraint where you have to maintain a minimum proportion of small-cap and mid-cap stocks. But in flagship funds, there are absolutely no restrictions, and that makes this category very different from an investor’s perspective. If you look at the performance of flexi-cap funds over a year, it usually falls somewhere in the middle. Sometimes one category does well, another doesn’t. But flexi-cap funds generally stay in the middle. So, this fund category tends to give you pretty stable and consistent performance.
It'll stay that way. You probably have a strong presence in the other categories. But volatility in those other categories can be really, really high. While flex cap can be more of a steady-state kind of fund, I think. So, it includes large cap, mid cap, and small cap, all with certain percentage allocations. You get all the flexibility here—like, if I feel large caps have become very attractive, then 99 to 100% of the fund can be in large caps. Or if I think small or mid caps are undervalued, then I...
You can have 70-80% also in small-cap and mid-cap, so there’s no restriction. Obviously, there can be restrictions and some issues regarding the liquidity of those stocks depending on the fund size. But that’s only if—again, if—you get your sector call right, I think you can manage that aspect as well in my view. Okay, thank you. But let’s dig a little deeper into this and try to understand it better. So, in a flexi-cap fund, you mentioned that the allocation depends on the market condition. If I feel that small-cap companies are doing well...
It's been beaten down way too much. The sentiment has turned really negative. You look at it and see a great opportunity to invest, so the percentage allocation could even go up to 100%. Yeah, theoretically it can go up to 100%. Obviously, we have our internal reservations and all, but theoretically, it can go up to 100%. Wow. So yeah, because this concern always exists in the mutual fund industry, especially when we have a limited set of stocks to invest in. And if there’s something like a small-cap focused fund in the mix, then new funds have also stopped coming in, you know, because...
So yeah, you definitely took that flexibility, right? And when pessimism hits an extreme, that’s when buying opportunities definitely come up. You know, most of the time when people sell, they don’t even have the option to hold on. Plus, I’ll add one more thing to this. Usually, especially in the last three or four years post-Covid, we’ve noticed a pretty interesting behavior: when a sector is doing really well, mid-cap and small-cap valuations shoot up a lot. We...
And when a sector is doing really badly and going through a tough phase, that's when mid-cap and small-cap valuations become super cheap. Take the cement sector as a recent example. Cement companies have been struggling for the last 18 months to two years. Competition was intense, there was pricing pressure, and volume growth wasn’t happening. So if you look at the valuations of mid-cap and small-cap cement companies today, they are extremely cheap. They are at a significant discount compared to the large caps.
While you don’t usually see this happening in some sectors, like when IT was doing well, some mid-cap IT stocks were trading at a 40-50% premium compared to large-cap IT stocks. So, this is a pretty interesting phenomenon we’re seeing right now. And that’s why, when we pick stocks or sectors, I’m flexible about the market cap—I don’t stress about whether it’s large or mid-cap. I can buy it based on its merit and sell it based on its merit. But this advantage probably isn’t available to mid-cap or small-cap fund managers.
Fund manager. So, that’s a huge difference in my opinion, which will be useful when the markets are trading at pretty elevated, fairly high valuations. Thanks for bringing this up. Now, about what you just said, it’s making me think. First, you have large-cap, mid-cap, small-cap — so diversification is one option. But second, at the same time, since the fund manager has this flexibility, the caliber of the fund manager really matters because it clearly depends on their judgment.
Obviously, the basis is data analysis and overall market factors, keeping in mind the fund’s mandate and the risk policies in place. But that puts a lot of responsibility on the fund manager, and there are so many flexible cap funds in the industry. Now, if everyone has this flexibility in their mandate, on one hand, you get diversification. But on the other hand, given the same scenario, one fund manager might think, "I’ll invest a higher percentage in small caps." Another might think, "No, that seems a bit too risky." So...
The difference in returns and risk comes from the fact that if my construction changes, it becomes completely different, right? So, on one hand, there's diversification, which gives me peace of mind. But on the other hand, there's a lot of dependency on the fund manager's judgment and caliber. So how do you look at these two? And can you explain to our audience—since you’re a fund manager and this is something you deal with all the time—how challenging it is to decide which industry or sector might perform well?
How do you see the future, and what's your overall investment philosophy at Tata Mutual Fund? First of all, I want to clarify that a fund manager isn’t like a tennis player. Fund management is more like a football team. We have a really strong research team that plays an extremely important role. I might be more of an executor, giving them guidelines and kind of hand-holding, but most of the ideas come from the research team, who do a lot of deep work. So no fund management team can deliver consistent performance without a...
Strong research team. I mean, fund management can only do so much. But it's really important for you that your team is strong. So when someone does something good, obviously everyone gets credit. Our research team is also very strong, and obviously, a lot of ideas come from them. And we have a pretty experienced fund management team too. What happens there? We also throw in a lot of ideas because we've probably seen more market cycles than they have—the phases with no returns and negative returns, right? So there's a lot of experience involved.
What happens actually matters a lot. So that’s one part — that I’m not alone. I have my team, so we do our own research. Please don’t think you’re the only person who knows all the talking points; let me clarify that. Otherwise, it’s very different. It’s a team game, not an individual one. That’s what I just wanted to make clear. So whatever success or failure happens, it’s all with us together. That’s one thing. And secondly, having a framework is really important. Whenever you’re managing any fund, you need to have a...
Framework. You can be all about growth. You can focus on value or whatever you want to be, but you need to have that framework in place, and you need to follow it. There’s no right or wrong philosophy—that’s what I’ve seen. But you have to stick to your philosophy. If you keep changing it, then your performance or results might end up poor or just okay. So, that’s my take. In our Tata Flexia fund, what we’ve done is created kind of a two-bucket system. About two-thirds of the buckets are where we take a top-down view. More of a...
Sector rotation. About one-third of it is more about the bottom of this approach. So, probably, a lot of inputs will come from our research team as well in that case. But the other two-thirds, which is more of a top-down approach, is where I, along with my other colleagues, keep thinking about which sectors we need to overweight and which ones we should underweight. So what we try to do in that is a really, really critical thing—we try to look at the cycles. Where are the cycles usually? What we've seen is that whenever a cycle bottoms out, your valuation becomes very reasonable.
Sometimes the market is cheap, earnings are pretty depressed, and you'll probably find 100 reasons not to invest. Then, when the cycle is really good, valuations are expensive, earnings projections are strong, and the overall mood is very positive, we’ll find 50 reasons to invest. Right? So, we try to strike a balance between when to be underweight and when to be overweight. That’s where our research and experience come into play. Because if you can get those cycles right...
Long periods. Obviously, there’s a risk that the cycle you’re in, where you feel like it’s hit bottom, could actually have a bottom come after two quarters down the line. It might not happen right away. So the risk you’re running is that you’re probably early in the cycle. That’s always going to be the challenge. But the key is how you weather that challenge. That’s where I think the biggest difference lies. What we do is look at the cycles, like I said. If a cycle hits bottom...
So yeah, we’re trying to get a handle on that situation. Like last year, say around September, October, November, banking stocks were way undervalued compared to Nifty, and the valuations were super attractive. Everything was negative in terms of sentiment and policy-making. This year, we’ve seen the complete opposite, right? I think there’s been a huge reversal in how regulators are looking at the sector. Same goes for the spaces we invested in, especially last year. This year, if you ask me, we feel...
I think the cement sector has probably hit rock bottom. I believe you'll see good price growth coming back in this sector. Similarly, the consumer sector is also one where we think there are some real earnings tailwinds. Obviously, the valuation is expensive. So, this is how we try to look at our fund and manage our exposure. About two-thirds plays a very, very important role, and the remaining one-third is obviously more of a bottom-up approach. So, when it comes to bottom-up ideas, that’s where I’m focusing.
Sure, everyone knows you gotta research individual stocks and put in the work because there are lots of small pockets and spaces where you can have a solid three to four years of strong growth. So, it might not be a very, very big sector—it could be a pretty niche sector. That’s exactly what we need. So, two-thirds is top-down, and one-third is bottom-up. Two-thirds we do sector rotation, and one-third we focus more on individual, company-specific research. Wow! Nice. So, is it fair to say that in the two-thirds top-down approach, you focus on the big companies at the top?
Cap companies or it’s a mix of large plus mid-cap—it's a mix where you see reasonable valuations. For example, like I told you, when the cycle is good, mid-cap and small-cap valuations tend to be higher than large caps, meaning they trade at a premium compared to large caps. But when the cycle turns bad, take the banking sector as an example. Right now, large-cap banks are trading at around 10 times valuations, while a lot of mid-sized banks are trading at roughly a 50% discount to that.
That valuation. So, that’s creating an opportunity, probably if someone does their research and takes a view of the next two to three years, looking at what’s happening in the economy. Logically, this valuation gap probably shouldn’t be this big. So these are the opportunities you get. And that’s why we probably look at things from the top down. So the sector does well. You probably see the opposite reaction if the sector doesn’t do well. You’ll have large caps doing better than mid and small caps. So we look at sectors and...
So, the market cap is mostly about the end product. GG, thank you Amay ji. Now, let me tell you something else — the universe of stocks is limited. Large cap, mid cap, small cap — mostly the top 500. So, large cap is the first 100, then the next 150 are mid cap, and the next 250 are small cap. Do you find this limiting? Because there are so many AMCs, and you know, all their interest is in these 500 stocks. So how do you find opportunities? Obviously, it’s a competitive environment. So, being a fund manager? You shared a philosophy about doing two-thirds and one-third.
You explained the concept. But how do you find relevant stocks, and what’s your thought process behind picking those stocks? Also, can you tell our audience how many total stocks are there currently in the Tata Flexi Cap Fund?
Yes. If you look at our fund, I usually don’t like running a very, very concentrated fund. Meaning, if you check the contribution of the top 10 stocks, probably our Flexi Cap Fund will have one of the lowest, I think, I would say. Okay? Because the reason is that then you’re always having individual stock...
Specific risk. I’d probably feel more comfortable looking at sector risk rather than stock risk. That’s the approach. So that’s one philosophy. The top 10 contribution percentage-wise will be one of the lowest. Plus, we don’t have 60-70 stocks in our fund. Usually, 45 to 50 is our comfort zone. Even if there are a few positions beyond that, they don’t contribute that much. So we’ll always have three or four stocks around 4.5 to 6% because they’re either coming in or going out. It takes time to build a position.
So yeah, this is how we run the fund, and that’s basically the comfort zone. This is what I think regarding size—I believe this is how we’ll manage the fund, at least for the next two to three years. My view is we’ll keep running the fund like this, and that’s totally fine. I think focusing on sectors is more important than picking specific stocks. So, avoid taking stock-specific risks, or maybe take a few, because I want to share an interesting point with you. Right now, I’m talking in quite a few places.
Here’s the thing: even if your sector call is right, the worst-performing stock in that sector can still outperform the best-performing stock of the worst-performing sector. So, it’s really important to focus more on the sector because that’s where the real gains come from if you get it right. Also, patience is key because a lot of times things don’t play out the way you expect. You work with some assumptions, but there are so many moving parts.
Obviously, no one has control over it, right? So that's why showing patience is really important. We all have phases where your sector call doesn’t play out, so you might lag behind during that period. But that’s exactly why we communicate with our partners about how we’re managing the funds. See, in good times, it shows up in performance, but when times get tough, this philosophy really helps a lot. Having that philosophy is extremely important. Otherwise, this category isn’t an easy one. It’s a...
The most difficult category is a flexible cap category, right? Because you have 500 stocks to choose from, and you probably have to pick about 10% of those 50 stocks, right? And as you said, the competition is so intense, so the outperformance can come from anywhere, right? Looking at the market the way we are at this point, that’s why the construct is really important and that philosophy is extremely important, man. Wow! Interesting perspective. You made a really good point. So, thank you for this perspective. Now,
We just talked about the thought process behind constructing and managing funds—the philosophy. Now, let's move on to being an investor. What things should I keep in mind? You also made a really good point about the behavior side of investing, which applies not only to fund managers but to the whole team and investors too. We'll get to that as well. But what are the key things we should focus on if I want to invest today? There are basically two ways: one, how to do it lump sum, and second, how to do it through SIP. From your experience, can you share with our audience how overall asset...
If I have to allocate or do asset allocation, how much should I ideally invest and what things should I keep in mind when investing in flexi cap funds? Definitely, let me first answer about lumpsum and SIP. Speaking about lumpsum, you should only do it when the market has had a massive correction; otherwise, SIP is a very good way to invest. The tenure of the SIP should be as long as possible because the market goes through phases where you might not get returns for two or even three years. God knows, that's how it's been for us in the last four years.
It’s not like that. But I’ve seen a phase from 2011 to 2013—that was the toughest phase. Probably 2018 to 2020 was another really tough time when market returns weren’t good. That’s why the tenure for SIP should be long-term. It’s really important to focus on your asset allocation. You can do it yourself or get an advisor, or you can choose a multi-asset category fund where you don’t have to do anything—the team managing it will handle everything. So whether it’s gold, silver, or whatever asset you feel comfortable with, go for that.
The class is where the fund management team will review everything. You don’t need to stress. There’s no need to invest in different places. If you don’t want that, just pick one diversified equity category. I usually recommend flexi because it’s a bit more consistent and stable. Then you can pick some debt products or other options based on what your advisors suggest. Secondly, I think what’s really important is how you behave during good times and bad. In the end, it all comes down to your entry point.
Valuations are really expensive, which means your future returns might be a bit limited. But if your entry point valuation is reasonable or cheap, then your future returns can be really good. So, I think it all depends on the valuation at which you enter the market, and also the valuation when you exit. Because returns can vary a lot if you pick two points where both are extremely euphoric, right? And if your starting point is...
A really cheap entry and exit point can actually end up being super expensive, and the returns can be way different. On the other hand, if you start with a really high valuation, entry and exit can be just as costly at a low valuation, and returns can also vary a lot. So, it really depends, which is why we always suggest people talk to an advisor. Because one thing that's really tough is controlling your emotions. I think most people probably have the IQ for their field, but it's the emotions that make the difference.
It’s really important to control yourself and not get carried away when the market is doing great and you start taking risks—just stay steady. I think it should be the other way around. When the market is bad, that’s when you should take as much risk as you can. So basically, I’d say focus on your core job, and handle investing and management through an advisor. Otherwise, just go with mutual funds. Yeah, thank you, and you’re absolutely spot on. I mean, the biggest mistake investors make is with compounding until...
The impact happens only after either the consistency in investing breaks, or if there's a market correction and my returns turn negative, people panic and sell off, thinking nothing’s going to work out. But I believe that if investors keep a long-term view and consistently invest, they will definitely see returns. Also, SIP and lumpsum— you gave a really interesting perspective that whenever there’s a steep discount, maybe lumpsum investing can be considered.
I think SIPs are the best for the long term because they involve cycles—both downturns and upturns. When you're investing during the down phases, you accumulate more units, which is great. So, over the long run, the impact of compounding becomes really significant. Wow, that's really interesting. Sir, could you please tell me what kind of risks are involved? If I invest now, talking only about flexi-cap funds, what risks should we, as investors, keep in mind? I think the biggest risk is valuation.
Yeah. When there’s a business risk, you can tell when your business call went wrong, right? But with valuation risk, what happens is the stock can still deliver earnings but doesn’t give any returns. I think valuation risk is the very, very different kind of risk to look at and consider, and we have plenty of examples. Remember the boom in the IT sector around 2000, like the .com bubble? After that, there were almost no returns for 8 to 10 years, even though earnings growth was pretty solid.
So, right, you look at recent examples of some of the big private sector banks, right? Their earnings were growing at like 15-16% CAGR. But returns were around zero or so, which is why valuation really matters. At least, this is my framework. Everyone can have their own framework and investment philosophy. But the way I see it, I give more importance to the valuation framework. And that’s why I always tell our investors to focus on valuation and don’t discount it. Yeah, yeah. But in simple terms, if...
To be honest, a simple investor doesn’t really understand valuations and all that much. But what are the things and tools an investor actually has? For example, if I want to check the valuation itself, obviously, the more I learn, the more effort I need to put in. If I’m investing my hard-earned money, I should know about it. So, I’ll focus more, read more, and try to understand. I’ll look at all the economic factors and their impact. Whether the valuation is cheap, reasonable, or stressed. But if I have to...
Not everyone knows everything, so if you could suggest three or four tools for our viewers to become informed investors, that would really help them in the future. You’re doing your job—you’ve set your philosophy, your thought process is clear, and you try to enter at the right time to generate alpha, keeping everything in mind. But for an investor’s life, what are those three or four essential things they should focus on? Because valuation can be a bit complex. I’ll try to keep it simple.
Yeah. Only a few people need to put in a little effort for that. So, I usually look at a simple parameter: what's the gap between earnings yield and bond yield? Wow. What's bond yield anyway? It's the 10-year G-sec rate, which you can get daily from the RBI website. How much is it running at? Like, say today it's at 6.2%. Okay. Then you need to check the Nifty's PE ratio. You can find that on the NSE website. Otherwise, the BSE website gives the daily BSE PE. Earnings yield? That's just the inverse of the PE.
If the PE is 25, the earnings yield is 4%. If the PE is 20, the earnings yield is 5%. So, you need to look at this gap. If you see the gap is too big or too small, you can adjust your equity and debt allocation accordingly. Wow. Because that way, you'll know which asset class you should be putting money into right now. Unfortunately, the problem as of today is that debt has also done really well over the last 12 months. Equity has been okay, probably the one-year return hasn’t been great. Gold has done really well. Silver has done well too.
Very well. So, when it comes to taxation, equity definitely has a clear advantage. That’s one point. From an investor’s perspective, if I have to decide where to put my money, FD rates are probably among the lowest. They might drop a bit more, but overall, where should I invest? That makes the situation a bit complex right now. Plus, India’s macroeconomic outlook is looking pretty good, as long as there aren’t any tariff-related uncertainties in the next 15 to 20 days or so.
I think it’ll become clear in days whether the tariff is sticking or not. Countries are adapting to these new tariff situations. The monsoon progress has been pretty good. Inflation is one of the lowest, interest rates are among the lowest, and banks’ balance sheets are some of the best. So, from India’s perspective, the market is actually looking very solid. So, what’s there to be negative about? Probably just a bit of discomfort around valuation. But I think that valuation discussion is gradually getting more accurate. I think in large-cap shares, if I...
Banks look reasonably valued and comfortable. Large-cap IT is also looking steady now, after about a six to nine-month correction. Dividend yields have moved up to around 4-4.2%, so there’s a bit of comfort showing up there too. So, I feel things are okay, nothing majorly exciting at this point. If you ask me about risks in the market, the only thing I can think of is some tariff-related uncertainty that India might have to face. Otherwise, it’s really hard to even put a four or five percent risk on what could happen.
At least I’m talking at the macro level. Individual stocks and sectors still have some challenges and issues, but overall, things are looking pretty solid. Honestly, there’s nothing right now that I find concerning. Wow! That’s really reassuring. Yeah, yeah. I think the government, or at least the central government, has done a fantastic job managing their balance sheet. I believe a lot of credit needs to go to them. There’s a lot of capital expenditure too, so probably one if you...
Want to see the private capex is still yet to pick up. I think that’s something we’ll keep an eye on. But if that also picks up, then we’ll be in a good spot, because right now, if you look, bank credit is just at 10%. For a country like India, where GDP growth is 7% and expectations are around 6.5-7%, 10% is really low. Like, way too low. The government has done their part. RBI has done a fantastic job. Again, I’d say in the last six months, the entire growth focus has shifted. If corporate credit picks up, then private...
When capex picks up, corporate credit picks up too. Debt growth can pick up. So, retail is doing well. The moment private capex picks up, corporate credit starts to grow. Even SMEs start to benefit. So, you have all the engines plus the monsoon doing well. Even agriculture should logically do reasonably okay. So, all four engines of the economy are doing well. If that happens, I think obviously we will have, hopefully, a good time in terms of earnings, which need to pick up, especially in the second half.
Alright, just to explain this kind of valuation level. Wow, nice. So, the perfect one is like an investment journey, right? I mean, obviously there’s a right time to start investing. If anyone out there knows, I’d tell my viewers the same thing—if you haven’t started your investment journey yet, please do start it, but with some understanding. Mutual funds are the easiest and best route because a fund manager brings a lot of experience, thought process, and investment philosophy. They do a great job managing everything, keeping an eye on risks and all that.
So, you know, just start your investment journey. Even if it’s small amounts like 5000 here and there, depending on what kind of investment you want to make, just stay consistent. Stay invested in India’s growth story. Because when you look back after 5 or 10 years, I’m sure the growth story will pay off and you’ll definitely get the rewards. So that’s one thing. And thanks for this, I’m really grateful. One more thing I want to mention, since I often appear on investor shows, is that many AMCs have plenty of flexi-cap funds as well.
Alright, I’m not going to get too specific about any mutual fund right now, but as an investor, if I have to choose from, you know, multiple AMC’s—there are like 44 or 45—and all of them have flexicap funds. If I have to pick one or two to invest in, what should my approach be? What should I be looking at?
So, first off, I think any investor should probably get in touch with an advisor because advisors usually have a deeper level of knowledge. And we also keep sharing a lot of information with them.
So, what's our philosophy? I can't just come and tell individual investors this is a good platform. Maybe we can share our investment thought process. I think it really depends on what the fund’s philosophy is—what the investment philosophy is. There's no point chasing every winning fund out there. Every fund will go through its own cycle. Investors should be comfortable holding onto the fund even during a down cycle, because in the up cycle, I’m sure everyone will be happy to own the fund, right?
And to understand that, it’s really important to know what the philosophy of the fund is. So, do your own study because on every website, like ours, you’ll find a presentation for each mutual fund. In that, we explain how we manage the fund. So, use your own logic, rely on your experience. If you feel like, “I like this philosophy, I’ll stick with it and invest here,” then that’s more important. If you’re doing it yourself, you’ll have to put in a bit of effort, obviously.
A lot of statistical ratios like standard deviation, beta, and all those things—you can find them anywhere. But my advice is to understand the investment framework of the fund. Know what the framework is and understand it, so you know what you're putting your money into and what's actually going on in that fund. Just because something has done well doesn't mean you should invest in it. Try to figure out why it did well and also what negatives might come up in the future. Because that's the toughest part for any investor.
I have to be honest, so here’s what I think: if you can’t figure it out yourself, an advisor is your best bet because they have way more in-depth knowledge. They’ve been in the game for 15, 20, even 30 years, so they’ve seen the full cycle. Plus, we have a lot of meetings with them to keep communication going about what we’re doing with the fund. So yeah, this is probably how I’d say one should approach it. Thanks for that. Now, an investment advisor definitely has a role, but a lot of our viewers are do-it-yourselfers and self-investors, absolutely. So I think it’s very much useful for them too.
Valid. You should look into it, you’ll need to put in some effort. Yeah, if you’re doing it yourself, you gotta work a bit. You need to spend some time because, see, no one gets rewards in life without effort. So, you’ll have to do some research. For that, you need to visit each website, and one thing is having a framework. And the other thing is, what’s actually showing in the holdings? Got it? People say they’re in it for the long term, but what’s the churn ratio? Yeah, that should be visible too.
Yeah, right. So your conviction should be clear too. If the cycle isn’t playing out, how long have you been holding that stock? How long have you stayed in that sector? You need to analyze your holdings over the long term, not just the past 12 months, because the benefits and what will happen 6, 9, or 12 months down the line matter. You have to look at what the portfolio looked like 24 months ago and then what changes were made after that. The philosophy you talk about should actually be evident, and the changes shouldn’t just be something you say in interviews.
Things are happening differently in real life. But for that, you’ll have to put in some effort. You need to keep an eye on what's going on with the fund. So, it’s a very time-consuming TDS process. That’s why I always suggest people, if you’re an engineer, focus on your engineering skills. If you’re a doctor, focus on that, and let someone else handle the investments. What happens then? Everyone sticks to their core work. That’s when things work out. Also, another point we have is about rigor in investments.
It's really important to be consistent. You’ve gotta take it seriously. Yeah, exactly. And discipline. I think a lot of times, people lack discipline. We make mistakes like that too, so having discipline is super important. Discipline, rigor, and patience—these three things matter. So, do it yourself. If you feel like you’re not able to manage these three things, then get some help. Yeah. Like from an investment advisor—that’s great. They do help. But for those investors who want to invest on their own, our goal is always to help every single investor as much as possible.
They should have enough knowledge so they can invest on their own. Obviously, if things get complicated or they don’t have enough time, they’ll definitely get help from an investment advisor. But for someone who’s an individual investor—and now with direct mutual funds available—the expense ratio is much lower. So, you know, the cost matters because compounding has a big impact in the long run. This is something our viewers often ask us about: what are the benefits? And if the investment advisor is good, it’s like going to a good doctor.
Alright, so here’s the thing. If that’s the case, it’s all good. But what we’re doing right now, having this conversation and you sharing such interesting perspectives, it’s basically our effort to make regular investors more aware. We want to give them enough tools and knowledge so they can analyze things properly on their own and make good investment decisions. Also, you mentioned the churn ratio, which is definitely something important. Like, if I need to compare five mutual funds, this definitely helps.
Let's talk about one and especially flexible cap funds. So, the churn ratio is one. Another point I want to make is that just because a fund has a high churn ratio, it doesn’t mean the fund is bad. My only point is, what’s your philosophy? Then you can relate that philosophy to the statistical information like the churn ratio and the fund’s beta, management quality, and standard deviation. You can find these statistical ratios on the website. What you’ll also get is the philosophy of the company and the fund management team behind that fund.
So now on the website, you have to link both, right? Okay. So, I would never say that low churn means the fund is doing something good and high churn is bad. That’s not how it works. There’s no correlation like that. My only point was that if I’m focusing on discipline, it should also show up in my statistics, right? If I’m saying that, there has to be a clear criterion. It should be looked at in an overall, comprehensive way. Like right now, I’m saying the way I look at our FlexiCap fund is more of a...
Valuation is trivial. So logically, beta should be slightly lower. Yeah. Logically, because if you look over a period of time, which kind of gets reflected in our fund. Our beta is one of the lowest. So, some of the parameters you can check, the ratios are always available on the website. Thank you. One more thing to mention is consistency in performance. Obviously, it’s market-linked. But in a flexi cap fund, since the mandate is quite broad, unlike focused funds or specifically mid-cap funds, you know.
For large-cap funds, where my benchmark is clear, since I can have extreme allocations in large-cap, mid-cap, and small-cap, can you suggest any tool or method that could help viewers? Like, if in a flexi-cap fund, the divergence in returns over the years isn’t consistent—sometimes extremely high, sometimes very low—then I won’t get peace of mind, right? If I look at it and compare it to the benchmark, and if it’s more of a linear pattern, then...
The volatility is really high. So, as an investor, can I include some mechanism in the tracker? I think one thing is, we often look at point-to-point returns. Instead of that, I suggest looking at rolling returns. If that seems a bit complex, then just look at SIP returns, okay? Because SIP returns capture all your ups and downs. So, if a fund’s SIP returns are more consistent than its point-to-point returns, I think that’s probably the fund I would choose.
Better category to invest in and better fund to invest in, because in the end, you’re doing SIP anyway. So, point-to-point returns aren’t really necessary, that’s right. If you caught the bottom and showed the rise, the returns would look great. Yes. That’s why focus on SIP returns. Getting that data is really easy. You can go to any website. I’m pretty sure it’s available on your website too. So that’s not a challenge. I think focus on the part that gives you a good idea of which fund to pick — look at the three-year and five-year performance. And that’s also...
Good material to look at. Wow, thank you so much. By the way, you mentioned two or three things. First, the investment philosophy of AMCs should definitely be checked. Is it just talk, or do they actually follow through with action consistently? And second, some examples of churn ratio, rolling returns, and SIP returns. I think more or less this will give me a clear indication and guidance on which mutual fund I should invest in. Sir, so thank you so much for this wonderful conversation and for sharing so much openly without holding anything back.
Here’s what goes on in a fund manager’s mind. Thank you so much.
