In the last 15 years, Indian asset management has grown leaps and bounds. One of the amazing success stories of this period has been Mirae Asset management, which is best known for its well managed equity funds.
In this episode, I caught up with Swarup Mohanty, the CEO of Mirae Asset Investment Managers (India). Swarup has been at Mirae since day 1 during a period when both Mirae and the Indian markets have grown immensely. I hope you enjoy listening to the conversation as much as I enjoyed recording it.
In this episode, he speaks about:
0:00 - Introduction
2:55 - Influx of young investors into the markets
5:55 - The evolution of Indian asset management
10:15 - Thoughts on the current market cycle
15:05 - The biggest mistakes investors make
20:55 - What’s it like to be the CEO of Mirae?
26:15 - Performance chasing
31:17 - Are there too many AMCs in India?
34:14 - Active vs passive
Transcript
Abhinav: Hi everybody. Thank you for tuning into another edition of the Zerodha Educate Podcast. So today we have with us Mr. Swarup Mohanty, the CEO of Mirae Asset Management India. Now we will use Mr. Mohanty’s immense experience based on the number of years in the industry and the fact that his fund has really given some phenomenal returns.
We’ll talk to him about some common mistakes that investors make, what mistakes you shouldn’t be making, and what are the steps that you should be taking. Apart from that, we’d also talk to him about the evolution of asset management in India. So please tune in.
Yeah. Hi Swarup, welcome to the Zerodha Educate podcast. And, thank you for taking time out for us. We understand that you’re very busy and we’ll just keep this podcast as short as possible and quick as possible.
Swarup: Thank you so much for having me. What you guys are doing at Zerodha is for all of us to see. So wish you all the best and wish everybody a Merry Christmas and a Happy New Year.
Abhinav: Oh, thank you. Thank you so much for that. Same to you. So Swarup, I just wanted to start by knowing a little about yourself in the sense that what was your journey like, and how did you enter into finance? Was it planned or was it like a happy accident?
Swarup: No, I come from a family of teachers. Both my parents are professors in zoology. So my family background and what I do are completely different. And when I told my father after my Class 12 that it’s not possible for me to do science anymore, there was a fair amount of hue and cry at home in the sense that my parents used to teach at my college also and the thing was, what will we tell my colleagues that my son is going to study commerce. And I said it’s better than failing in science. So it was a root shock there. But you know, as I started studying, what happened at that point of time was the liberalization of the country. You know, it was happening under the Manmohan Singh regime as finance minister, and that caught a lot of things, in our mind, in the sense that things will change in this country and hence this journey towards finance.
And one led to the other. I didn’t start in mutual funds, I started mutual funds in late nineties, and I’m so thankful that I did. I’m so fortunate to be doing a fiduciary role, and to be, what can I say, The safeguard of somebody else’s hard-earned money is a huge responsibility, and I’m so thankful and to be doing such a job day in, day out.
Abhinav: Yeah, and as you said, the responsibility that is placed on your shoulders is immense. And, you guys at Mirae Asset have really done a phenomenal job. And I just wanted to ask, so over the last few years you’ve delivered quite the, you’ve delivered really well, right? You’ve been very responsible with people’s money.
At the same time, you’ve given them some well deserved profits also. So what were the hits and misses that you would think, and let’s say your journey with Mirae Asset has been really good. Now, is there anything you would want to do differently or you are really happy with what’s happened and how you handled it?
Swarup: So as you rightly said, I think the job is to deliver a certain level of performance, and that is what we do on the active side. The active side’s endeavor is to give returns above the market and we were discussing this just before we start, and that is what we call alpha, the market returns come from the passive side, which is the index side or ETF investing.
When somebody gives us money on the active side, our endeavor should be to give slightly above that returns for which we charge a fee. So far as our journey has been satisfactory on that side, but what is happening in the country is, we are seeing the unfolding of the demography. As we speak, it is the youngest country in the world. It is staggering to think that 60% of world population under 30 years is in India. And that has started unfolding post-COVID on the investment side also. The young have started investing and let’s agree on one thing that the young of India are economically superior to the previous generations. Like my son is superior to me and I was slightly superior to my father.
So they come with a different risk profile. They come with a very different knowledge profile. Because everything is available on the mobile phone. I mean, in my days there was one library in my hometown and we used to cycle some four kilometers for some information that is not so. And if I tell my son this, he is gonna believe this, that 20, 30 years ago, this was the state.
But with that, knowledge and that economic superiority comes their ability to invest in different types of investment vehicles. So as we progress in the journey of our asset management in India, and we enter into our 15th year next year, our job would be to cater to that sort of demography. Keeping in mind that a lot of our existing investors are from a previous genre, but the next, batch of investors which will come in, will look at varied products across risk spectrum, and if we can deliver that both on the active as well as on the passive side, I think we will be rightfully continuing this journey and doing merit to the different, requirements and demands of the investors.
And trust me, the investor profile of India is changing and changing very fast. You at Zerodha are a big example of what this demography is doing to investing in capital markets, and we are taking you as a base for our future product planning, the kind of investors you have introduced to the market is exemplary.
Abhinav: Thank you so much for that. Like, rightly so we also believe that we have a demographic dividend to reap. While we hope that investors don’t behave, young investors don’t behave irrationally, and it turns into a demographic nightmare. But I hope that that won’t happen. So, Swarup as you had mentioned that you’ve been in the industry for 15 years how have you seen the landscape evolve vis-a-vis asset management, and what are the things that you wanted to change but you couldn’t? Or in the sense that there are some things that could have changed for the better, but they’re still the same, maybe because of legacy issues or inertia or something like that?
Swarup: Just a small correction. I’ve been in the industry for around 27 years now.
Abhinav: No, no, no. In Mirae.
Swarup: This is my 12th year in Mirae Asset and this is the 15th year of Mirae in India.
Abhinav: Yes.
Swarup: But see, you know, when you look at, the country and when you look at the dramatic change that is happening and is reflecting in the asset management industry, if you go back to the asset management industry at 10, 15 years ago, we were broadly owned by corporate or institutional investors.
Today, when you look at that breakup of that industry, more than 50% of the assets under management are owned by, individual investors now. So gradually this investment vehicle is reaching its rightful ownership, and that is, it is a retail product at the end of the day, and it is beginning to play out.
I’ll just give you one very interesting example. This industry is around 25-26 years old, broadly private mutual funds. Until March 2021, the industry had around 2.23 crore folios. Last year, the industry added 1.08 crore folios. That is how it is changing, and in post COVID, we’ve seen, the need for investing, at a different level.
And then see when you’re pushed back in your life and then in your life, when you look at, two big aspects, one are your needs and your wants. Typically, we cater to the wants part because that is the aspirational side of our life. But when you’re shut up in your house for two years, not being able to cater to your wants side, and still life goes on okay, your entire view on how you spend money changes, and that’s what is reflecting post COVID.
People have come out, much aware on the need of investing, the possibilities of investing and the ways to invest. The expense statement of most of the people has changed and that is going to reflect on our industry in the next four, five years and that’s beginning to play out by that one crore folios, which came in. At the same time, as I said earlier since the demography is changing, the need for products to change is also very, very important. We’ve seen that happening over the period of time.
And that’s a journey which will continue and I think the industry’s really stepping up for that. The other part, which the industry has stepped up very well, I think is on the tech upgrade. Today, transacting on mutual funds has become fairly easy and the ease of transaction is also a result of, more number of investors coming in.
The third most important part, which I’d like to point out is, you know, earlier you needed to be in a city to transact in that city. Now, this tech upgrade has demolished all that. There is no such story called India and Bharath when it comes to investing. It is one country. So all this is leading to a position where the rightful penetration of this product can happen.
And, for the industry, we have to step up on two fronts. One is step up really on the infrastructure of fund management because if money comes in, we have to manage it well. That at Mirae Asset is center stage, we are on a continuous hiring spree, both our debt management side, on our equity management side, we continue to add talent on the passive side, on the product building side. So that’s an ongoing process. The other one is, do we have the capability to take in and, service these investors on the client servicing side. So these are two sides which we continuously build, and it’s a continuous process. We recheck it every quarter, practically every month and if there are any gaps, we continue filling it.
Abhinav: So moving on from your experience and your take on mutual fund industry, now there are certain questions that I have vis-a-vis, let’s say, investor behavior in the market and how investors are behaving. Now, before we move on to that, there is this question that I wanted to ask you that the markets this year have been a nightmare globally, but India has still presented a fairly solid picture, right, and so how do you make sense of all of this? Like, what’s your take on this?
Swarup: Abhinav, I think you already said it, that you know, there is a reason market behaves a certain way, right, and the reason is playing out. The global factors or the global markets behave in the way the global factors are and you can’t deny those two large events which have led to this, one obviously is the COVID part where in my entire life I have never seen the entire economic cycle or the economic activity of the world having come to a stop. Even during World War II or III, whichever, some part of the world was functioning.
But here you put the entire globe at a standstill and you and I also know, suppose I keep my house shut for two years and I open it after two years, there’s a fair amount of maintenance that is required and we were in that phase and suddenly the war happened, right? Two large such, events will impact the economy of the world and when the impact is more towards the commodity side and typically, oil prices in particular, the impacts will be large, and that is what is playing out in the world.
But contrary to the world, India looks like an island. I mean, let’s look at data post-COVID from say, investment investing to buying four wheelers via GST collection to medical insurance, to power consumption, to all data. India has continuously been on the uprise year on year, and after two years of COVID the base is not exactly small, so the percentage growth is continuous on a different base, and that is reflecting on the Indian markets. But contrast that to US, US probably is seeing data, which is not seen in the last four decades. The kind of inflation that we see in US, UK and we are hearing Japan now are pretty different from what they used to be.
And I do believe that as Indians we are far more resilient than people of those countries right. We have gone through far more hardship in our lives than they have, so we are very different when it comes to approaching life in general, forget investing.
So when you look at petrol going above, say, 100/-, 5 years ago, governments should have shifted, but today nobody is questioning it because broadly people know why it has crossed. And slowly they start inculcating that in their lives. Not that any vehicle is stuck in anybody’s house because of fuel prices at highs, they adjust somewhere else, but move on with life. Similarly, businesses also start moving on inculcating these changes into their broad financials and then continue doing businesses, right? So when you look at broad markets, there is a reason why global markets are behaving like that and you cannot discount that or their impact, possible impact on India in the next, few years. But at this moment, India stands alone and that is why the markets have, behaved the way they have maybe in the short run and I’m saying maybe Indian markets look a little expensive when it comes to Global markets but when you spread that to five, six years as India takes this journey from say two and a half, 3 trillion to 6 trillion, the future is pretty, known to all of us.
Now, what is also transpiring at the ground level is there is a fair amount of consolidation of businesses, post COVID. Our house view was post COVID, it is advantage large companies, and when it starts consolidating, it is going to be consolidating towards the larger part of the, you know, market cap or the larger companies. And the effect or the benefit of that will be the capital markets. Hence, people will start enjoying the benefit of this growth through the capital markets more than it was in the previous five ten years.
So that’s something which people need to understand and then they are understanding I feel that’s why probably the surge towards financial assets over fixed assets and it’s a country which I’ve always lamented that we Indians have not owned through the stock markets. I’m very happy to say that through people like you people have started owning our markets and hence will benefit from the growth of India.
Abhinav: So right now you talked about behaviors of investors in the industry as a whole. Now I want to ask a little more specific question vis-a-vis Mirae Assets. So what has been investor behavior this year versus last year when it comes to Mirae funds in particular.
Swarup: Yeah, I think, you know, it’s a very important question, especially from last year perspective. Two huge learnings for me, okay. One was last year we had launched an international called fund called FAANG+, which was a 10 stock portfolio in disruptive tech. Now tech globally has had seen a meltdown, right, this fund is practically down 20-25% from its face value, or it’s down 25% since last year. If I were to talk about investor behaviors, say five years ago, there would be a lot of hue and cry on this loss. But because we are not able to accept money in global funds due to regulations, I’m getting just one question. Why are you not opening it? When will you open for us to be able to average? And that is a huge shift in both investor behavior as well as risk taking ability of these investors. And it’s so refreshing to see that people know that these are 10 stocks of believe that these are 10 stocks which will take technology ahead globally but because of the special situation of the world being where. Some of the prices that they’re getting it at are fairly attractive and are willing to buy at these falls, which is a dramatic shift to investor behavior.
The second part is, I think for the first time, and I’ve seen some of our funds underperforming for seven, eight months. We’ve not had a seven, eight month underperformance since inception, but it’s a classic story right now of growth versus value in the market. Our style is more towards growth, so our funds have taken a backseat vis-a-vis some of the value funds which have surge ahead, but it’s so good to see investors understanding that and staying put, right. And then both these, our goal for for wealth creation going forward, and I’m taking Mirae out of the picture here.
Because when you look at investing in equity, it is for the long term, markets will behave the way they, they will, but the behavior of the investor more often than not decides the wealth they create. Market is cyclical in nature. So it’s how you behave in your downturn mostly gives you the wealth you get on the upturn of the market. So I’m reflecting on these two incidents which have been very, very interesting sort of learning for me and reflects well on the way investors have started approaching investing.
The third part is, you know, when you look at interest rates being where they are and the silver in country now coming and giving some very interesting yields, people have started buying those yields on the debt side and locking in money to some very, very interesting sort of yields and taking benefit of this situation. Also, I’m seeing dramatic maturity of investors as the days go by and the years.
Abhinav: So when I asked you this question, you’ve actually three birds with one stone because these are two themes that I wanted to talk to you about, the thematic investments and the fact that markets are cyclical and you can’t outperform all the time.
So I just wanted to hear from you as the CEO of Mirae Asset, right. Let’s say sometimes obviously you’ve generally done very well, you’ve outperformed. But there would be lean periods, right, where your strategies are not doing well, where your funds are not doing well. So what do you do at that point in time? What do you tell your team at that point of time? That’s something I wanted to know from your side.
Swarup: Abhinav, see, there are two people in this whole business, okay. There is the fund management team, and there is the investor. The rest of us have just one job, and that is to communicate transparently between the two. That’s our job and that’s something which we want to do. Especially when, you know, people would believe that there is a downturn in our investment or in our investment return. We have to be very clear in our communication as to why it is happening. There has to be a definite reason, right. At this moment in some of our portfolios, there is a contra call, and then if you look at the broad market and you see the broad market, some of our calls have started playing out in the financials. Our call on healthcare and pharma is yet to play out, and some of our calls on IT are actually in the negative.
But if you look at the three broad pillars of this economy which is financials, healthcare, and IT on a 5-10 year horizon, you know, these are the large pillars and when they play out the fund portfolios will eventually play out. Sometimes it’s good to be on the contra side and then suddenly from growth we are sitting on a lot of value part of the market. So if we communicate that transparently with people, and you have to be very upfront in this communication, and then people not only understand you, people respect you for that. Over the years I must admit that, over the years, because now I’ve been selling funds for quite a number of years, I’ve become more vociferous in this communication enduring downturns, because this is when you really come out, you have to come out and talk more.
When you are performing well, you need not communicate so much, but in your downturns, you have to be very visible and be very upfront about it because behind every performance there is a why and behind every underperformance there is a why and people just need to know that. And once they know that they are clever enough too understand, and their acumen should not be underestimated at any point of time.
Abhinav: It’s almost beautiful to see how much faith you have in your investors and how much you respect your investors. Now while coming to investors and you know, you are obviously accountable to them. So there is this old saying by Keens, right, The wisdom of life is that it is, let’s say, better to fail unc, fail conventionally than to succeed unconventionally.
So, I’m sure that also plays a little onto your mind in the sense that because there’s so much responsibility attached with how you manage funds, I’m sure there are certain calls or are there any calls that you want to take because that might be, let’s say, contrarian and you believe that those calls could work, but at the same time there’s a lot of responsibility in on your shoulders that you can’t take those calls.
So like how, how does this statement affect the way you transact in this business and how you take those calls?
Swarup: Abhinav, very deep question, I must say. But you know, there are two sides to this question. One you cannot ever diminish the responsibility even in the fourth decimal right, it is a responsibility which has been given to us, and you have to uphold it every second of work, okay.
Mistakes can happen, right? But mistakes cannot happen knowingly. There is no space for that. We are not magicians, sometimes our calls can go wrong but you cannot make fundamental errors of selecting a company. Sometimes the company of selected may not have a good run in the short run in the market that is fine. We can go and say that, you know, we like this company, but the value unfolding has not happened. That is probably acceptable to over to investors, but investors cannot accept the fact that we chose a wrong company, right.
There are two sides to it. So as long as our selection is correct, and we have merit to that selection, sometimes some companies don’t play out in the short term,right. And I can give a number of examples, but we are not allowed to do stock specific calls, I’ll stay away from it. But people know that sometimes, you know, it has taken years for some companies to perform and suddenly in one year you get everything. With your hindsight in interest put together, right. But as long as our selection process is okay, we are fine. And see our job is not very complicated, our job is to look at the entire universe and put together 60, 70 good stories in any portfolio and within those 60-70 it is not necessary that all 60 have to perform. If a broad part of those stocks perform the NAV is intact. If you cut out that noise and do this systematically over a period of time, performance starts happening at a consistent level and that is our aspiration is to do that. Sometimes, yes. Some of our stocks might not perform in the short term if we keep on evaluating them ruthlessly. Sometimes our calls might go wrong based on which some of these portfolio stocks get exited and that happens to all of us, but we cannot shy away from saying that some of them have not run or if there are mistakes come out and be very open, yes, this was a mistake and making the mistake is not that big. I think how you correct and get out of that mistake is then reflects on the NAV going forward. And you have to be very, very ruthless on that. We very mechanical address. There is no ego stage in this, right, that is how you operate at a fund management level.
The other part is, you know, you cannot take away the fact that the underlying market is changing by the day. And you know, if your external market is moving faster than you, than you stand to be disrupted. So you have to keep an eye on that and then cater those sort of ideas as we speak and see broadly, you will agree, till now India has been investing in a market cap way, large capital cap, small cap. While larger economies, the investors there have moved on not only to thematic investing, but have gone into mega ideas we need within themes. We are probably on the threshold of that as we get into thematic investing how do we identify the future themes. Next year, our consumption theme will get into its 10th year, right, and if you look at the growth of that fund on the track road, it has been second to none in the, I mean, it’s up there. We are in the fourth year of our healthcare fund. We are in the second year of our financial fund. So we are building themes as we speak, and that is keeping an eye for the future.
At the same time, we are building a very strong passive portfolio which is catering to the young and they like good ideas. So from having the basic market cap, Nifty 50 to a global electric vehicle fund, we have the entire range. By next year we’ll have 30, 40 ideas there. So both work in tandem, and then you have to keep your house in order on the sanctity of your funds and continue to create track record. At the same time, cater to the different needs of investors by providing them good futuristic funds. So they work together.
Abhinav: So I’ll come to the questions of active and passive funds and asset allocation, but before that, there is something that’s been on my mind. So there was this 2020 article that I read which said that so throughout the 10 years of the Mirae Emerging Bluechip Fund, which has delivered phenomenal 18% returns, only 911 people were there from the beginning till the end. And this is not specific to Mirae Asset fund, so there was this DSP Equity Fund that had also delivered 19% since 1997, but only 24 investors had stayed.
Now we see this at Zerodha itself, right, because people keep on jumping from one fund to another. So why do you think this happens? And what do you think about this problem of investors not staying invested, because the funds have really been doing well, right, if they would’ve been there, it would’ve done great for them.
Swarup: I’ll reflect on my personal journey in investing. When I started investing, I was a return generator, right, I thought I knew more than the market. I knew when it was to get out and when it was to get in all that I tried and I was a disaster, right, and I’m from the mutual fund side okay. Please bear that in mind when I say this, okay, but you know, over the years you mature as an investor and slowly you realize that what starts at a return generating journey actually is a risk mitigating journey. Your investment journey becomes superior if you are able to imbibe or put together your own risk profile with the investment vehicles risk profile.
The closer you are, the more, you know, what can I say, you are better off in your mind with that, and hence you are able to travel the entire journey together. This is easier said than done. I mean, in 2008, 2009, when the markets crashed, I had run away from the market, and by that time I had already spent over a decade in the industry, let me tell you.
But when COVID happened, I was ready. In this COVID, I really cracked it. I was waiting for the markets to fall and then slowly but surely you realize that there are two types of investors in the market. If you are a buyer, you want the markets to fall. If you are a seller who wants the market to go up, you have to decide who you are, both are right. I’m a buyer so I am not happy with market peaking, I just want markets to go down so that I can continue to buy. But with that comes the ability to hold, right, and that is beginning to happen. And you are seeing that, especially in the SIP form of investing. I can’t say that about the lumpsum investors because they’re still market timers, but when it comes to SIP investors, they’re beginning to stay put.
Abhinav: They’re being very true to the process. They’re sticking to the process.
Swarup: You know, maybe when these SIPp investors graduate to lumpsum investing, a lot of these market returns would’ve gone out, but fact is they will benefit a lot by just staying invested in the market.
Now see, it is very simple. 3 trillion economy will go to 6 trillion. And I’m, mark my words, even if you have chosen a wrong fund will at least double in this period by virtue of the underlying market, right, but staying invested is more important. See 99% of your money you make by your investment behavior rather than your investment vehicle.
Abhinav: That’s a beautiful insight to give.
Swarup: 99% of global financial plans fail because the only thing required for making money is discipline and it’s very difficult to do that because the market, you know, creates such opportunities to give that discipline a break, right. But that happens over a period of time. But you know, over the last five, six, if I were to give you the same data, maybe I’ll come and give you the data, you can publish separately. If I look at the last five years data of Emerging Bluechip, it’ll show very different picture, right. Maybe I should come and do that, this has given me a good idea, let me do that and then you will see the two things, you know, people also want to see track record of the fund.
Now it’s a catch-22 situation, while everybody’s expectation is from the fund manager is to catch a stock early, it should be the expectation from the investor of the distributor to also catch a fund early, but they wait for track record. So hence, it’s a catch-22 situation. It’s an art and science to catch a stock early, so it should be also a fair amount of art and science to catch a fund early.
Abhinav: That’s very well put. That’s very well put. And also coming to funds, I’ve just realized that, you know, today there are 40 plus AMCs now and everybody’s broadly investing in the same stock. So sir, like don’t you think it’s now harder to stick out? And so how do you stand out and does it make your job more difficult?
Swarup: Yes, it does make our job extremely difficult. It is not as easy or the same job has become very difficult from when you compare it 10 years ago, right. Like you rightly said all of us are investing in the same stock, so it’s only when there are, you know, people buying and selling that a price discovery happens, right. In volatility always lies the opportunity, but when many people start buying it and holding it, the volatility starts decreasing and when it starts decreasing, returns also start diminishing. That is what is happening. That has happened to global, right, and we are probably on the threshold of that beginning, of that journey, right.
That will happen more with larger stocks where people buy and hold. So returns will probably come down in the large-cap area, but they will become stabler also. As we start graduating towards the smaller stocks, which we call, you know, mid-caps or, or smaller-caps, then probably, you know, there the spaces are still there but that is also diminishing.
Now in any trade, forget mutual fund, in any trade there are 40, 50 manufacturers. You will see three, four manufacturers stand up, because they remain true to label, they put a certain quality on the table, right, and that is our job. Our job is to be true to label. If you have said it is something, it should be behave and then keep that quality of that product intact. If you do that over a period of time, you get differentiated. You don’t get differentiated by some people might get differentiated by newer ideas but whatever it is, they might put a new idea in place but they have to implement that idea over a period of time. That is our job to be through, to label and demonstrate this over a period of time. Abhinav, I’ve always maintained that this is a business of simplicity and continuity. Keep it as simple as possible and continue this simplicity over a period of time, you will be one of those few people standing in the market because it’s very difficult to do it. Me saying this is very easy, me being able to demonstrate our decade or two is impossible.
Abhinav: So you have to walk the talk, that’s the main thing.
Swarup: There’s no other way. My saying anything has no meaning, I have to deliver it.
Abhinav: Okay. So based on everything that you said here, you talked about diminishing return, then you talked about standing out.
So there are all these questions that are floating around right, about market efficiency and alpha and now, given that you guys are predominantly known for active management given the track record of your managers that I’ve been following, like Mr. Neelesh Surana, etc. So how do you think of this idea of diminishing alpha, right?
Because that’s also something that’s been in the talk of late. Recently there was a money control talk, I think a couple of days ago, the mutual fund summit, where they talked about can mutual funds continue to outperform. So I want to know what you think of this notion of the diminishing diminishing alpha. And if you could take out like 10 seconds and explain to our viewers what alpha is.
Swarup: Yeah. Okay. So Alpha is that return over the market. When you look at the market, there are certain indices which define the market. Say, I’ll give an example of nifty 50. Nifty 50 defines the top 50 stocks of India on market cap. Market cap is the number of stocks available in the market into there multiplied by the stock price. This is the top 50, market cap stocks in the market. Now, when you invest, say in a large cap fund, which is benchmark or is compared to this Nifty 50, an active manager will try to or will be the endeavor to give you returns above Nifty 50.
That is why you hire an active manager, right? And that’s the job of an active manager. And sometimes it might go below, sometimes it might go above, but over a designated period of time, which we define as three years or maybe above, the endeavor of the active manager should be to give you returns above that.
Now, as the markets become transparent, as the markets become mature the difference between this and the return start coming down because like we explained earlier, people start buying into these 50 stocks and holding them. And once you do that, the fluctuation of these stocks starts diminishing and hence what we call the maturity of the market starts increasing. And that happens in all economics. If you go to larger economics, this has already happened, thankfully for India. We still maybe some years ahead away from that, but the discussion that has happened is fundamentally not flawed.
My personal opinion Abhinav is that though it is getting tough, there is still enough talent in the industry to deliver Alpha, though the number of people are decreasing, but there is enough talent, but at the same time there is a set of investors which is saying, and it is also true that in this pursuit of giving alpha, there is a chance of underperformance.
It comes both ways, right? Why take this underperformance risk? Why don’t I buy the market? And when you buy the market, since there is no analysts involved or fund management involved, typically you’ll buy the market at a lower cost, right? And when you find a fund which can efficiently replicate the market, there is a new set of investors which is graduating towards that.
Nothing wrong, nothing right. Each to his or her own portfolio demand. So India is at a very interesting stage. Both sides come with their merits and there are takers for both. But what is happening is on Index investing or the ETF, or the passive investing as we call it. There are some ideas which are unique and my favorite example is, say the Next 50.
We are talking about the next 50 stocks, which is the top 50, then the next 50. These are not small companies. There is no active fund, which is benchmark to next 50 in the industry. So you don’t have an active manager, which is giving you this next 50 stocks in one portfolio. You can take any number of active funds together, but you will not get this next 50.
So if you add the two, your portfolio can become better. So the point I’m making is at this moment, if you add the two, your portfolio can become stronger. Find some good managers who you are confident can deliver alpha add them to some interesting stories, which you are not getting on that side and your portfolio can become far superior.
Abhinav: Okay. So I believe we are a little short of time, thank you for being with us. If there’s a parting message that we can ask you to give to our investors in general, what would that be? How would you ask them to not shoot themselves in the foot, so to speak?
Swarup: Yeah. You know, I’ve been believing in this, that there is a risk to investing. There is an equal risk to not investing, right? There is a risk to investing in equity. There is an equal risk to not investing in equity at this moment of time with where we stand, there is to not investing, as well as not investing in equity is far larger.
You know, sometimes a lot of time is spent in where to invest. Don’t bother about that, invest and stay invested. It’s a country which is going in a different direction. At this moment some of the global funds are available at prices, which were not available just one year ago. The investor at this moment is spoiled for choice.
You can pick some great US funds at some great value. India is on a structural growth and it’s time to reread the way we think about India from a next 10 years perspective, the debt yields is at very attractive prices right? Wherever you want to invest, the investment universe is there for you.
You will only make wealth when you stay invested, so stay invested. Cut out the noise and just focus on your goals. Fixed goals, that is something which I’d like to, if you don’t know why you are investing, don’t invest. First, pick up why you are investing, where you are investing is not the bigger issue.
Once you know why you’re investing, where to invest is very easy. But there is a fix purpose to your investing the day your purpose is met. Please redeem and enjoy your purpose.
Abhinav: Fair enough. Thank you for that advice. It was beautiful talking to you. I hope we’ll probably get to have more conversation like this again, especially when you have a lot of time at your disposal, which I think it’s tough for someone like you. But if you can take time out for us, it’ll be great to have a conversation with you and continue this.
Swarup: Thank you so much, Abhinav. Really a pleasure, and thank you so much for having me. Wish you are very happy new year.
Abhinav: Thank you. Bye-bye.
We hope you enjoyed this absolutely brilliant conversation as much as we did recording it.
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