Portfolio Review of a Mutual fund!

Summary

The 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

00:00

🤔 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.

05:01

💡 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.

10:04

🌍 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.

Keywords

💡BFSI Sector

BFSI stands for Banking, Financial Services, and Insurance, a key sector discussed in the video. The speaker mentions holding multiple investments in this sector, including NBFCs (Non-Banking Financial Companies) and banks. The BFSI sector plays a critical role in their portfolio strategy, but they also consider diversifying within this sector by investing in mutual funds that include companies they wouldn’t buy individually.

💡Mutual Funds

Mutual funds are investment vehicles that pool money from many investors to purchase securities like stocks, bonds, and other assets. The speaker explores whether investing in mutual funds focused on specific sectors, such as BFSI or energy, can provide diversification and access to stocks they wouldn’t normally buy individually. They view mutual funds as a way to tap into opportunities outside their immediate knowledge or reach.

💡Dividend Yield

Dividend yield refers to the percentage of a company's share price that it pays out in dividends annually. The speaker uses the example of Coal India, which provided a 20% dividend yield at the time of their purchase, as a key reason for their investment. However, they also reflect on how the investment rationale has changed over time, with the stock's price multiplying and the dividend yield no longer being as attractive.

💡Energy Fund

An energy fund is a mutual fund that invests in energy companies, such as those involved in oil, gas, renewable energy, and other energy-related industries. The speaker questions whether they should switch from holding individual energy stocks, like Coal India, to an energy fund that could potentially offer better diversification and management in the changing energy market.

💡Index Funds

Index funds are mutual funds or ETFs designed to replicate the performance of a specific market index, like the Russell 3000. The speaker mentions studies showing that while most companies in an index may not perform well, a few 'home run' companies can significantly drive returns. This raises the question of whether it's better to invest in index funds, which capture these winners, rather than relying on personal stock picking.

💡Global Funds

Global funds are mutual funds that invest across international markets. The speaker discusses the difficulty of determining where to invest globally—whether in China, Japan, or the US—and how a global fund could help mitigate this uncertainty by letting professional managers make these decisions. They also mention that switching investments between countries on one's own can be tax inefficient, highlighting the benefits of global funds.

💡Speciality Funds

Speciality funds are mutual funds that focus on specific industries or sectors, such as pharmaceuticals, BFSI, or energy. The speaker considers these funds as an option for focusing on sectors where they may not have expertise, like commodities or healthcare, allowing them to benefit from the knowledge of specialized fund managers who can identify the best times to invest in these areas.

💡Commodity Fund

A commodity fund is a type of mutual fund that invests in commodities, such as oil, gold, or agricultural products. The speaker refers to their investment in an HSBC commodity fund, aimed at participating in potential booms in markets like Brazil. While not a major focus of their portfolio, it represents a way to diversify into commodities and benefit from sector-specific growth.

💡Capital Gains

Capital gains refer to the profit made from selling an asset like stocks or real estate at a higher price than the purchase price. The speaker contrasts capital gains with dividend income, highlighting that capital gains are taxed at a lower rate (12.5%) compared to dividends, which are taxed at 30%. This tax difference influences their decision to possibly shift from dividend-paying stocks to funds that generate capital gains.

💡Balanced Advantage Funds

Balanced advantage funds are mutual funds that dynamically shift between equity and debt depending on market conditions. The speaker considers these funds as a strategy for reducing risk, especially in a bull market when stock prices may seem overvalued. These funds allow for automatic rebalancing, helping to maintain a balanced portfolio without the need for constant manual adjustments.

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