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Effective diversification is key to success in investment: Prashant Jain, HDFC AMC

, ET Now|
Updated: Oct 15, 2018, 07.46 PM IST
Systemic risks in equity investment can be reduced by longer holding periods: Prashant Jain, HDFC AMC
Systemic risks in equity investment can be reduced by longer holding periods: Prashant Jain, HDFC AMC


  • It is hard to go against the flow, something that seems to be making money every day.
  • It is not difficult to spot excesses in the market.
  • Always remain effectively diversified .
Even average active manager in India has a far better chance of outperforming the benchmarks than what they have in US as mutual funds own just about 5% of the markets in India, unlike 40-50% in the US, Prashant Jain, Chief Investment Officer, Executive Director, and Fund Manager, HDFC AMC, tells Ajaya Sharma of ET Now.

Edited excerpts:

Should one go for passive investing or active investing?

There are two views – one is of John C Bogle who believes in indexing and, the other is Warren Buffett who believes in active management. Both are correct and there is no conflict between what they say.

What Bogle is saying is that if you look at active managers as a group in US, where mutual funds own almost half the market in US, it is not possible for that half the market to outperform the other half. It is a very mathematical simple conclusion. Since you do not know which active manager will do well, you are probably better off with active managers.

On the other hand, Mr Buffett says stocks are driven by emotion in the short run and human beings are very emotional and markets are always creating excesses and when you create an excess, you also create an opportunity.

If you think long term, if you are disciplined, if you understand elementary valuations, you can outperform the markets. I do not think that emotional aspect of either the markets or human beings is going away. Not everyone can outperform the markets but someone who is able to rise slightly above emotions, think long term, think logically can. The market does throw up opportunities every now and then. In any case in India, mutual funds own just about 5% of the markets. We are far away from the US situation where they own 10 times the markets. So, even the average active manager in India has a far better chance of outperforming the benchmarks than what they have in US.

A lot of people have their individual portfolios down 40-50% on YTD basis. A lot of mutual fund portfolios are down 12% to 15% on YTD basis. Should they go about putting most of their money in mutual funds or should they have a balanced approach trying to do their own stuff to one section of their portfolio and let some of the experts manage the other set?

There are two issues. Whenever you are investing in equities, you face two types of risks. One is the systemic risks, when whole markets go up. Most stocks tend to go up and when whole markets come down, everything tends to come down. That is one risk which you can reduce only by longer holding periods. You cannot do anything about it. But there is a second type of risk in markets which is the non-systemic risk. Every business faces different risks.

If oil prices and interest rates go up, if currency depreciates, that would be good for some businesses and not so good for some others. This risk can be handled effectively by diversification. Mutual funds maintain the discipline of diversification which I have seen majority of retail investors fail to do. Just having 20 names in the portfolio is not diversification. In ‘99, people used to have 10 IT or TMT names and thought it was diversification. There are high correlations between various businesses or various sectors at a point of time.

Recently, if you bought few sectors which were highly correlated, you may feel I own 20 stocks but actually you are not effectively diversified. So, the first principle is we must always remain , effectively diversified whether in direct portfolios or in mutual funds and not in terms of numbers of names.

The second issue that I would raise here applies to the majority. It does not apply to individual investors who are outstanding, who have done extremely well but the bulk of the investors tend to get carried away with the markets.

In 1999, after IT had done very well, almost everyone was overweight IT and very few were focussing on other sectors. Around 2008, you could see the same preference in real estate or capital goods. No one was talking about FMCG or pharma in 2008 and last few years we have again seen a similar focus on certain sectors or certain caps. So what does this tell us? It tells us that people are simply extrapolating the last few years’ performance over the next few years.

Whatever has gone up sharply is likely to be more expensive but people think they will simply extrapolate and that is why many investors are disappointed with the outcome.

How do you spot the excesses getting built in mid and smallcaps?

It is not difficult to spot excesses. What is very hard is to go against the flow, to go against what seems to be making money every day. In 1999, everyone knew that IT companies are trading at few 100 PEs and non-IT companies were trading at low or mid-single digit PEs. Similarly, in 2008, real estate companies were more expensive, market caps were bigger in consumer companies or IT companies. So, it was not hard to spot. The challenge was to go against. How do you say let me buy something which is probably value but is not performing and ignore what is going up?

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