Should Mutual Fund Investors Buy The ‘Entire Market’?


Invest for an adequately long horizon, with diversification across segments (large/small /theme /passive), fund managers (multiple AMCs) and geographies.

The equity market is apprehending volatility as global central banks are about to normalize (read, hike) interest rates. Most discussions these days are around diversification and ways of diversification. The possible ways for diversifying your investments are (a) booking part profits from equity and investing the money in other asset classes like debt or gold (b) shifting to defensive low-beta funds and (c) geographical diversification. The concept of geographical diversification is that you allocate part of your equity investments to another market, where the fundamentals are different from India’s.

Though it may seem that in today’s age of information flow and interconnectedness of markets, all markets would move in a similar manner. But the correlation between markets is low. If we plot the returns calendar-year-wise, returns from the Indian equity market will be different from that of the USA, which again will be different from China or Europe. The reason is, fundamental factors, demand-supply aspects, etc., are different.

Talking about the biggest equity market in the world, in terms of market capitalization and the largest economy in terms of GDP, is the USA. One concern may be there: when the US Federal Reserve is about to hike interest rates and reduce the surplus liquidity in their system, there would be an adverse impact on the equity market. While theoretically, that may be the case, the arguments for investing are (a) the fact that US Fed is hiking rates is a sign that the US economy is recovering, apart from inflation concerns (b) today interest rates are ultra-low and system liquidity is super-surplus; normalization is not as big an issue (c) when we are looking at factors that influence market level, we are in effect trying to predict the market.

That goes against the grain of portfolio allocation, which should be as per your investment objectives and risk appetite, not as per predicted market level. The other counter-argument could be, India is the growth leader now, in percentage GDP growth terms, over other economies in the world – so why go to other markets? The answer to that is, to have the majority allocation of your portfolio to India, but diversification has proven benefits, so allocate a portion to other countries.

What are the advantages of allocating money to the US market? You are diversifying your portfolio risks and returns, due to the low correlation with the US market. With the global interest rate cycle about to reverse, global flow would rather be to the US than to India. The other advantage is, a feeder fund in India collects money in INR, converts it to USD for investments and when you redeem, it gets converted back to INR. Any Rupee depreciation adds to your return, as the current conversion happens at a higher rate. This is over and above your returns from the fund, and usually, INR depreciates against the USD.

We also mentioned the concept of buying the ‘entire market’. The ETFs and Index Funds follow an index, which is usually large cap stocks, or maybe a little broader index covering a larger section of the market. Then there are funds that invest in the entire market. That is, almost all listed stocks. In India, we have Mirae Asset Equity Allocator Fund of Funds (FoF) and Nippon Passive Flexicap FoF. The Mirae fund invests in Nifty50, Nifty Next50 and Nifty Midcap150 ETFs. The Nippon one is more diversified, buying into Nifty100, Midcap150 and Small-cap250.

ETFs and Index Funds represent passive investing, where the fund manager simply follows an index. There is no objective of outperforming the benchmark, rather it saves on costs as the running expenses charged to the fund are lower than active funds. The pioneer of passive investing in the world is Vanguard, founded by John Bogle, who floated the concept that if actively managed funds are not outperforming the benchmark, the investor would rather follow the benchmark and pay lower fees. Today, Vanguard is the largest in the world in passive fund management.

Navi MF has launched Navi US Total Market Fund, which is a Fund of Fund that will invest in Vanguard Total Stock Market ETF. This Vanguard ETF invests in the entire US market, across more than 4000 companies covering approximately 99% of US stocks. Since this covers the entire market, you get exposure to non-S&P-500 and non-Nasdaq 100 stocks. As per recent regulation, funds in India with international mandates are not accepting fresh money, since the overall exposure is approaching the industry-wide limit of USD 7 billion. This has happened because, over the last two years, the AUM of these funds increased ten-fold, which shows investor appetite. However, you can buy ETFs at the exchange and ETFs are accepting fresh money in the form of NFOs or the creation of units.

Trying to predict market levels and allocating money based on it is futile. Invest for an adequately long horizon, with diversification across segments (large / small / theme / passive), fund managers (multiple AMCs) and geographies.


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