'Focus On The Long Term & Stay Invested'

Gautam Sinha Roy is a PGDM from IIM Calcutta, and Vice President at Motilal Oswal Asset Management Company. Roy currently serves as the Fund Manager for the MOST Focused Multicap 35 Fund and MOST Focused Long Term Fund. In a free wheeling interview with BW Businessworld, Roy talks about mistakes retail investors usually make with respect to Mutual Fund investing, on whether SIP's or Lump Sums are the best way to invest, and on how Motilal Oswal AMC aims to differentiate itself from the pack.

In your opinion, what mistakes do retail investors typically make with respect to Mutual Fund investing?
Mutual Funds are one asset class where the availability of daily quoted value sometimes works to an investor's disadvantage. This is because while the long term path of good mutual funds is healthily upwards, they oscillate hugely along their way up. One would rationally expect investors to use volatility as a friend- right? But what happens is the opposite! Every sharp fall induces selling driven by fear. And every sharp rise induces greed-led buying. Actually it should be the other way around. To give an analogy: suppose an investor had decided to buy a house at a particular price. If by chance he gets a 20 per cent discount on the negotiated price post the purchase decision, would he shy away from the deal? The same approach should be followed while investing in your chosen mutual funds.

Equities, especially, are a long dated asset class. Hence, focusing too much on near term performance is not worth the effort. The right approach to investing should be this: spend a lot of time on the drawing board before investing. Take professional advice and evaluate the plethora of investment options available to choose what is best and what suits your needs. Evaluate the capabilities and commitment of the investment house and understand their investment process.

Another aspect worth mentioning is that investing in Equity is a specialist job. Like all specialist profession it is done best by full time professionals. So investors are trying to save a small outgo in fund management fees could be counterproductive. As often it is long term under-performance which hurts investors much more rather than fees, which are anyways very small.

Should retail investors invest lump sums of money into Mutual Funds, or simply stick resolutely to SIP's?
Retail investors should ideally do both. Both these methods can be very productive means of asset allocation if used wisely. Let me explain why:
SIP is an all-weather strategy and its beauty lies in that it is dummy-proof and saves the investor from his own (behavioral) mistakes. This is because it forces the investor to keep allocating even when market has corrected sharply and doesn't over allocate when the market has spiked. Thus it simply cuts out the emotional aspects of greed and fear from the investing process. Every equity investor should have a SIP plan.

Lump sum investing should ideally be restricted to take advantage of market corrections (better still sharp corrections in your favorite funds). For this it is advisable to use asset allocation discipline tool like Motilal Oswal AMC's proprietary MOVI index. Also, whenever an investor receives wind-fall cash inflows, he should deploy that in lump-sum.

How do you view the role of mutual fund intermediaries and distributors evolving over the next 5 years? What are the advantages and disadvantages of direct plans over regular plans?
I believe Investment Advisory community has a key role to play in the financial aspects of nation-building. Why so? Well, they have the onerous but must-do job of improving this country's capital allocation and financial literacy. If India is expected to take a place in the high table of the global who's who, I don't think it can happen with a huge portion of the country's savings idling in Gold and unused real estate. This raises the cost of capital and raises the hurdle rate for fresh investments. Thankfully over the years, India has seen a thriving community of Financial Advisors build up in the more prominent cities. There are some really passionate IFAs who are doing a wonderful job of investment intermediation. May the tribe grow! The other aspect is that this community now needs to penetrate into smaller cities and towns.

Of course for investors who are completely attuned to the mutual fund industry (very few are), nowadays we also have the option of investing directly intoMutual Fund products. The biggest advantage that Direct investing brings to the table is the ease of the process. As such the business model of the distribution business will gradually move towards high quality advisory as against pure reach and processing. This is all due to the disruptive effects of the internet which keep bringing product manufacturers directly in touch with the end-customer in industry after industry. But please remember that this industry does not manufacture uniform products (ETF being slightly exceptional). There are a vast plethora of distinctly differentiated products and there are vast plethora of customer needs which need to be addressed. So the need will be there for someone to match the right product with the particular customer. In this aspect too we are seeing a disruptive force beginning to take shape in the form of algorithm driven or Robo-advisory. India being a vast and diverse country, we will definitely see the different models of distribution and advisory co-exist over the coming years. It will be matter of customer choice and convenience as to who uses what. As they say- horses for courses!

What advice would you give to the readers of BW Businessworld with respect to investing into Mutual Funds?
Firstly I would like to congratulate them on having made this choice which is one of the biggest decisions that will impact their life. Equity investing ranks high amongst the most efficient ways of enhancing the purchasing power of savings over the long term. Please Focus on the long term and invest with a long horizon in mind. Also, be strategic about your financial objectives and write it down even before the start of the investing process. Thirdly, choose your adviser wisely. Pay as much attention to this aspect as you do while selecting your life-partner. While getting in be prepared to ride the volatility but rest assured that you will be rewarded amply for the risks taken, over the long term. Start with keeping things simple- start with SIP in a couple of rock-solid funds with a great investment house and solid track record. As you gain familiarity with the process try to do more sophisticated products and asset-allocation strategies. This is going to be a long term journey and not joy-ride at the carnival. Expect and budget for some pain along the way. Lastly, once if you have invested, try to defocus from the short term. A great way of doing it is to invest only in close ended schemes like ELSS (Equity linked savings schemes) which come with the added benefit of tax-saving, thus enhancing the customer's returns.

Considering that Motilal Oswal AMC is still relatively young, how do you aim to differentiate from the pack with respect to your broad investment strategy?
We do have a longer track record (13 years) in the PMS business. Along this decade plus journey and as well articulated in the "Wealth Creation Studies", we believe we have learnt a few things. We have learnt that (a)equity is a long dated asset class- the longer you stay invested, more optimum are your results- hence our mantra "Buy Right- Sit Tight" (b) a company must exhibit certain characteristics to be able to compound wealth at a superior pace. We have crystallized these characteristic and indoctrinated it as part of our stock picking process which we call QGLP denoting Quality, Growth, Longevity and Price respectively. Such companies are able to garner certain strong competitive advantages and also able to keep extending the period over which they enjoy these advantages (c) Last but not the least we have realized the value of Focus in optimizing risk-reward in the investing process. Hence our Focused approach toinvesting resulting in concentrated portfolios. Indeed, this is an approach that is very unique to Motilal Oswal AMC and we are confident that this approach will stand the test of time, as it has done in the past.