Portfolio Review of a Mutual fund!
Summary
TLDRThe speaker discusses investment strategies in mutual funds, particularly in sectors like BFSI and energy. They emphasize the benefits of funds for diversification and access to shares that may be otherwise unattainable or overlooked. The speaker highlights the importance of balancing individual stocks with funds, citing examples from art collectors and equity index performance. They also touch on global market uncertainties and the challenges of managing a diverse portfolio. The speaker concludes by recommending a mix of direct equity, mutual funds, and balance advantage funds to optimize returns and tax efficiency.
Takeaways
- 💼 Holding a BFSI sector mutual fund can provide exposure to companies that the investor might not buy individually, diversifying their portfolio.
- 🏦 Even if an investor holds many banks, NBFCs, and other financial companies, investing in a BFSI fund might still be beneficial for diversification.
- ⚡ The investor is considering switching from individual energy stocks to an energy fund, especially after the decline in dividend yields from stocks like Coal India.
- 🎨 The analogy of art dealers buying a variety of art is used to explain how diversified funds can outperform despite some investments going bad, similar to the Russell 3000 index analysis by JP Morgan.
- 📈 The investor wonders whether putting money in a fund that picks high-performing companies could result in better returns than managing a portfolio individually, given that only a few stocks significantly drive the market's performance.
- 🌍 It’s challenging to time or decide on investments across different global markets, such as the U.S., China, and India, making global index funds or actively managed funds attractive options.
- 🔄 Switching between different funds can be tax-inefficient, but global or specialty funds might reduce the complexity and tax burdens of managing such transitions personally.
- 💡 The investor highlights the need for ongoing monitoring of fund performance, emphasizing that one can't simply invest and forget, even with good fund managers.
- 🛢️ They have invested in a commodity fund and a REIT fund as a way to diversify into international markets and sectors not easily accessible through direct stock investment.
- 📊 Holding a combination of direct equity investments and mutual funds is a strategy the investor prefers, allowing flexibility between individual stocks and managed funds, depending on market conditions and personal investment goals.
Q & A
Why does the speaker consider investing in mutual funds despite being astute in the BFSI sector?
-The speaker considers investing in mutual funds because they offer exposure to a diversified portfolio of companies that may be beyond individual reach or outside of personal investment expertise.
What is the speaker's rationale for potentially selling shares in energy companies and investing in an energy fund?
-The speaker is considering selling shares and investing in an energy fund to benefit from potential diversification and professional management, which might offer better returns than holding individual stocks with diminished dividend yields.
How does the historical art dealers' investment strategy relate to the speaker's thoughts on mutual funds?
-The speaker draws a parallel between art dealers' strategy of buying a wide range of art with the expectation that some would greatly increase in value and the potential benefits of investing in mutual funds, where the fund manager's selections might include some high-performing stocks.
What is the significance of the JP Morgan report mentioned by the speaker?
-The JP Morgan report analyzed equity index returns from 1980 to 2014, showing that while a majority of companies underperformed, a small percentage of companies provided significant returns. This illustrates the importance of having a diversified portfolio that includes potential high performers.
Why does the speaker believe that investing in global indices might be a good strategy?
-The speaker suggests that investing in global indices could be beneficial due to the difficulty in predicting which markets will perform best and the tax inefficiency of frequently switching investments between countries.
What is the speaker's opinion on actively managed funds compared to index funds?
-The speaker acknowledges that actively managed funds might be a good option if the fund manager can identify and invest in high-performing stocks that could significantly outperform the market.
Why does the speaker mention the importance of monitoring the performance of mutual funds?
-The speaker emphasizes the need to monitor mutual funds because the performance can vary widely depending on the fund manager's ability to select successful stocks.
What is the speaker's view on commodity funds and their potential returns?
-The speaker has invested in a commodity fund but does not expect great returns, suggesting that commodity funds may offer reasonable but not exceptional returns over time.
How does the speaker feel about the current valuation of Indian stocks compared to other countries?
-The speaker believes that Indian stocks have high PE ratios compared to companies in other countries like South Korea or Taiwan, suggesting that investing in funds that offer exposure to these markets might be a better value.
What is the speaker's strategy for managing risk in a high PE market environment?
-The speaker suggests diversifying investments by including a mix of direct equities, equity mutual funds, and possibly balance advantage or multi-asset funds to reduce risk and manage asset class shifting.
Why does the speaker mention the potential tax implications of switching from dividend income to capital gains?
-The speaker points out that the tax rate on capital gains could change, affecting the advantage of switching from dividend income, which is taxed at a higher rate. This highlights the need to consider tax implications when making investment decisions.
Outlines
🤔 Weighing Mutual Funds vs. Individual Stock Investments
The speaker reflects on their experience with mutual funds in the BFSI sector, comparing them to individual stock holdings. Despite some stocks being out of reach or difficult to identify, the funds have performed well, leading them to consider the benefits of holding such funds. The discussion extends to investing in sector-specific funds, like energy, based on factors like dividend yield and potential returns. The speaker uses the example of Coal India, which offered a significant dividend yield when purchased, but later questions whether it’s better to invest in an energy fund rather than individual energy stocks.
💡 Art Investment and Fund Management Comparisons
Drawing a parallel between art dealers in the 19th and 20th centuries and modern fund managers, the speaker discusses how investing in funds is akin to those dealers buying various artworks, some of which turn out to be extremely valuable. The speaker references a JP Morgan report that analyzed equity index returns from 1980 to 2014 in the U.S., noting that a small percentage of companies can provide exceptional returns. This leads to a discussion on the importance of diversification within a fund, as even if many investments fail, a few successful ones can drive strong overall performance. The speaker questions whether it’s better to invest directly in an index or rely on a fund manager’s decisions, especially in volatile markets like China.
🌍 The Complexity of Global Fund Investments
The speaker emphasizes the challenges of managing investments across different global markets, such as the U.S., China, and Europe, and the difficulty of knowing when to switch between these markets. They suggest that investing in global funds or MSCI index-replicating funds might be a better option for managing this complexity. Additionally, actively managed funds that focus on specific sectors, such as pharmaceuticals or BFSI, can provide more flexibility and control over sector allocation. However, the speaker advises caution and close monitoring of fund performance, as poor fund management can lead to suboptimal stock selections.
📉 Balancing Risk with Commodity and REIT Funds
The speaker discusses their investments in commodity and real estate funds, including a small investment in an HSBC commodity fund and a global REIT fund by Pimco. These funds help diversify risk, especially as Indian market valuations (P/E ratios) are high compared to other regions like South Korea or Taiwan. The speaker stresses the importance of shifting from individual stocks to funds in certain cases, particularly to reduce dividend tax rates by moving toward capital gains. They also mention holding long-term investments in strong companies like HDFC Bank and Reliance, which they believe will remain solid despite market fluctuations.
📊 Benefits of Balanced and Multi-Asset Funds
In conclusion, the speaker suggests that balanced advantage funds or multi-asset funds can be beneficial in a bull market, as these funds allow the manager to shift between asset classes and adjust portfolio quality. Such strategies help mitigate risks related to overvaluation or industry-specific bubbles. The speaker also highlights the tax advantages of capital gains over dividends and the flexibility these funds offer compared to holding individual stocks, emphasizing the need for a diversified approach to portfolio management.
Mindmap
Keywords
💡BFSI Sector
💡Mutual Funds
💡Dividend Yield
💡Energy Fund
💡Index Funds
💡Global Funds
💡Speciality Funds
💡Commodity Fund
💡Capital Gains
💡Balanced Advantage Funds
Highlights
Mutual funds can expose investors to stocks they might not buy individually, which can still perform well.
Holding a BFSI (Banking, Financial Services, and Insurance) fund can diversify exposure to sectors like banks, NBFCs, AMCs, and insurance companies.
Energy funds may be a better option than individual energy stocks, especially if initial reasons for buying specific stocks (e.g., high dividend yields) no longer hold.
Investing in funds that select high-performing stocks can still generate significant returns, even if a large percentage of the portfolio performs poorly.
A JP Morgan analysis showed that 7% of companies in the Russell 3000 contributed to substantial portfolio growth, even though 64% of the companies failed.
Investing in index funds or specific funds with diversified global exposure can be more effective than trying to manually switch investments across countries.
China’s market performance has been poor recently, but its long-term growth potential may still surpass Europe or even the US.
Tax efficiency should be considered when investing in funds versus individual stocks, particularly in global markets.
Specialty funds that focus on specific sectors (like pharma, BFSI, or metals) can provide targeted exposure to outperforming sectors.
Switching from individual stocks to funds may reduce risk and increase diversification, especially when market P/Es are high.
Holding some direct stocks while also investing in mutual funds offers balance between individual control and fund management diversification.
Actively managing portfolio quality and asset class shifting through balance advantage or multi-asset funds can provide flexibility during volatile markets.
Brazil's commodity market exposure through funds may provide future opportunities, though returns might be modest.
Global REIT funds, like the Pimco International RE fund, offer a way to diversify into real estate without directly owning properties.
Tax differences between dividends and capital gains could impact decisions on holding stocks or funds, making capital gains potentially more favorable.
Transcripts
welcome to
subani I was seeing the portfolio of uh
two three uh mutual funds in the bfsi
sector and there were many companies
which I wouldn't have ever bought them
but those funds have not done too badly
uh which led me to think that apart from
the nbfcs and Banks which I'm holding I
can also hold a fund uh which holds uh
some of these shares some of those
Shares are beond reach some of those
Shares are something which I will never
buy on my own some of the shares I could
never have identified on my own so these
are the reasons why I would hold those
um funds even though it is bfsi where I
consider myself reasonably uh astute as
an investor so if I have many banks if I
have U nbfcs if I have some AMC some
insurance companies etc etc uh am I
better off investing in the bfsi
fund having asked that question same
question can I ask am I better off
investing in an energy fund rather than
an energy companies because the energy
companies which I bought I bought for a
very specific reason that I was getting
anything between 5 to 20% repeat 20%
dividend yield I think at 117 rupees
when I bought uh uh coal India the
dividend was almost 20 rupees so it's
almost 20% dividend deal today those uh
the reasons for which I bought those
shares is completely lost simply because
the denominator has grown multifold so
is it better of selling those shares
paying the taxes at 12 and half% and
putting money in a energy
fund why was this trigger is because I
read a report I'm not sure which uh from
where I read the report but I read a
report about some AR dealers in the 19th
and 20th Century that they went around
the countryside just buying a lot of Art
they just bought all the art that they
could lay hands on knowing fully well
that some of them would explode and some
of them would do very well and all of
them made fortunes they made a lot of
money in buying the art in various
places now I also read a report by JP
Morgan I
think where they have analyzed the
returns that the equity index gave from
1980 to 2014 in the US 64 companies went
F almost 64 % of the companies went for
uh but 7% of the companies hit the ball
out of the park using their own language
which was enough to give them a this is
I think the Russell 3000 where they got
50x right so in 34 years if your
portfolio grows up 50x uh I think on a
TR basis you've done extremely well if
so will should you put money in a fund
in an index or in any of such funds
knowing that 60% of the calls by the
fund manager will be wrong not because
he is wrong but because the fund is
composed of some such shares which could
go for but if he or she uh picks up
enough shares which hit the ball out of
the park if they pick up some 100 bagger
I mean which becomes a 100 bagger in 10
years or things like that will that
return be greater than the returns that
you can get because if you don't get
those seven if you get anything out of
the other 9 3 there very good chance
that you will underperform the index
with higher stress and higher standard
deviation this is a question which is
very difficult for all of us to answer
so whether it is investing in the
overall uh index of the country or over
IND of the index of the world because
there is no way how you can know whether
to sell in China Buy in Japan sell in
Japan Buy in China Buy in Taiwan Buy in
Korea uh maybe Buy in uh Europe or us
you don't know what to do for example
today it is fashionable to criticize
China and said in 20124 China has done
very badly uh of course it has done very
badly 200 to 2024 I think the market is
down more than 50% and the government is
doing everything that it can including
arresting uh investment bankers to stop
the fall but the market is not stopping
but remember the growth in China is
likely to be better than the whole of
Europe individually if you take each
European country none of them will grow
as fast as China uh maybe us also will
not grow as fast as China given the size
that China has that is really
commendable assuming even for a minute
that the best three markets to invest
today are us China and India for you to
make those switches as to how much in
China how much in us how much in Taiwan
is very difficult so if you have a fund
which goes and invests in International
uh
indexes maybe replicating the msci index
or something like that maybe you will be
better off because there is no way how
you know how to switch and it is also
very tax inefficient if you switch so
putting money in a fund which invests in
global uh indices uh just Global indices
it could even be a fund which switches
uh which is an actively manage Global
fund you could put some money there you
could also put money in an actively
managed um speciality fund speciality
fund means Focus fund so that fund will
decide when to invest in Pharma when to
invest in uh bfsi when to invest in in
something else maybe steel and metal
right they will choose when to invest
where that is also not a bad option
because these are things which is very
difficult for you and me to do uh do I
want to name those funds and those fund
houses no answer is no because when they
do approach me I act very hotty and say
uh I will not take money for naming you
so I don't want to name them without
taking money or with taking money so I
will not name them it is for you to go
and do the research uh I stick to a few
fund houses that I think I've said
enough number of times I can't go and
retrace what I do but there is a risk
that if the fund manager is not good he
may end up or she may end up buying
really bad stock so you have to monitor
don't think that you can just put money
in one or two uh good uh funds and go to
sleep for the rest of your life you
can't you may have to be alert to see
what's happening I've also invested in a
commodity fund uh here I think I'll have
to name it which is HSBC which is giving
me reasonable returns nothing great but
I don't think it's going to do too great
because over the period of time it has
not done very well but I'm there in a
commodity I wanted to be in a commodity
Fund in Brazil saying when the Brazil
Market booms or something like that
happens I will participate but it's an
extremely small insignificant amount of
money but I have some money there
similarly have some money in a re fund
how can I invest in global reats except
through a fund and there is only one
fund so go and search there's only one
Global re fund so I can afford to name
them it is the Pim uh International re
fund which I think makes sense because
today at 12 and a% tax with the dollar
designated return it can't do too badly
and it's a good way of reducing risk in
the market where the Pees are so high at
least in
India similar comparative companies like
which are there in say South Korea or
Taiwan are today much cheaper than what
it is in India Indian PE is high so uh
shifting from lower quality to higher
quality may make sense shifting from
Individual stocks to funds may make
sense though of course if you're very
sure that you want to put money in say
sun Pharma you think it's a good buy
then you can put money in a Pharma fund
or a healthcare fund and buy Sarma you
can put money in a bfsi fund and bu HDFC
bank right does not stop you from doing
that or you look at some bfsi fund which
is uh not so much into banking which is
into non-banking uh companies maybe
mutual funds insurance companies nbfcs
Etc and then you also buy HDFC bank that
is if you want to own HDFC bank that's
different my my I have HDFC Bank bought
at some ridiculous price of 40 bucks or
something like that and I will continue
to hold it for the rest of my life
because uh Reliance HDFC H C gate
Seamans cumins
will I ever go to zero in that answer is
no I think the lowest I'll go in terms
of numbers is about 1,000 cholam Coral
carbom Universal uh maybe even Eid Parry
will I ever go to zero in some of these
shares answer is no I will not I will
continue to have them in my portfolio
because I believe that I've got enough
return for the rest of my life so I will
just stick to them but will I but do I
have too much of a choice can I sell uh
Indigo and put it into a transportation
and Logistics fund no I don't look that
I am not very happy with what I'm seeing
in transportation and log Logistics fund
so I may not but I may after 6 months I
may so that reduces the size of the
portfolio reduces the standard deviation
of the portfolio and may not do
something dramatic with the returns but
it does one thing it shifts my income
from dividend which is taags at 30% to a
capital gain which is Stags at 122% that
itself is not bad but you should not do
anything stupid like this because
tomorrow capital gains should go could
go up to 25% and the differential that
you are hoping for is more than lost in
the AMC charges right I don't need an
AMC to hold HDFC bank and Reliance for
me I can do that myself so depending on
what you want to do uh all these things
make sense to have some equity and some
uh uh mutual fund direct some direct
equity and some Equity mutual funds and
uh in case you are worried that you that
the uh that debt is Stacks at a very bad
rate maybe balance Advantage Funds right
so some balance Advantage fund or
multi-asset fund where you let the fund
manager do the asset class shifting and
portfolio quality shifting right so you
could do all these combinations is a
good things to do in a bull market like
this because when you don't know whether
the PE is too high whether an industry
is overprice ETC you can get out of that
particular ETF right thank
you oh
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