Sensex @ 30,000: What Experts Won’t Tell You

The S&P BSE Sensex has breached the 30,000 points mark. Celebratory cakes have been cut, and anchors of business channels have experienced bouts of ecstasy on live television. The print media has published statistics on markets' journey and performance. Clearly, these quarters are abundantly excited.

With investments delivering handsomely, investors have reason to cheer as well. However, not every investor shares the excitement palpable in the media. For some, markets touching record highs has led to anxious moments. These investors have been singed by markets in the past, especially after sharp surges.

For such investors, the all-important question is: Where are markets headed next? Will they continue to surge, or is another crash on the cards?

As is often the case, investors are seeking answers from experts who routinely feature in the media. However, even a cursory glance at quotes and op-eds reveals that experts have chosen to tread the middle path.

For instance, they strike an optimistic note by mentioning India’s strong fundamentals, conducive macroeconomic environment, expectations of robust flows. Simultaneously, they sound a note of caution by speaking about how earnings have failed to keep pace with markets, expensive valuations in certain market segments, and global factors such as the US Fed's stance.

It is evident that investors who are seeking an unambiguous answer from experts will be disappointed.

And, here’s why—No one knows where markets are headed in the near-term. While experts can make reasonable estimates of how markets will play out over the long-term, predicting near-term movements is anyone’s guess.

The trouble is that no expert will risk losing his ‘halo’ by publicly saying “I don’t know how markets will behave in the near-term”. Likewise, no print publication or channel is interested in quoting an expert who says so, or simply advises investors to focus on the long-term.

As a result, investors are subjected to convoluted and non-committal views from experts.

What investors must do

On their part, investors would do well to look inwards, instead of relying on experts.

Investing is a personalised activity. In other words, a ‘one size fits all’ approach doesn’t work. Hence, investment decisions must be made in line with one's risk appetite, temperament, and investment goals.

For instance, investors who are overly worried that an imminent crash might wipe out their gains, shouldn’t hesitate to book profits. In particular, investments that don’t agree with their profile; now is a good time to exit them at a gain.

Investors who are at ease with the vagaries of markets should continue to invest in line with their plans. For such investors, any downturn will present an attractive investment opportunity. 

Investors who find themselves between the extremes, can consider adopting a wait and watch approach.

The key lies in making a choice that works for you, and standing by it. That will lead to a far better investment experience, than relying on an expert who speaks half-truths.

Should Investors Tap Into Media For Investment Advice?

Last weekend at a party, I met a rather interesting individual who declared that ‘the best things in life are free’. To buttress his view, he spoke about investments, and questioned the need to engage an adviser (read pay a fee), when one can get free advice from the media i.e. publications and television channels. I’m unaware as to what drove his belief: experience or the lure of ‘free’. In any case, his views found several takers, and soon he was dishing out ‘free advice’ on the best sources of investment advice. 

To be honest, this isn’t the first time I have heard such views being expressed. Many investors are convinced that sourcing and acting on investment advice from media can be financially rewarding. But is that line of thinking prudent? Let’s find out.

Advice vs. Coverage

Any adviser worth his salt will agree that investment advice should be focused on the investor i.e. customised to his risk appetite, investment horizon and goals. The key is to navigate the investor’s portfolio through various events, and stay on course to achieve predetermined goals.

Conversely, the media typically focuses on current events and trends. The journalist/host will have a perspective in place. Domain experts contribute to the perspective with quotes and/or data. Having covered one event, the media moves on to the next.

Whether or not the coverage is apt for every investor following it, is anyone’s guess. Therein lies the fundamental difference between investment advice and media coverage.

Go Where the Wind Blows

In Feb 2016, when domestic equity markets crashed, stocks of public sector banks were among the worst hit, reeling under burgeoning bad loans. Expectedly the media coverage was negative, and most experts opined that the worst was far from over.

Between then and now, both bank stocks and equity markets have staged a smart recovery. While fundamentally not much has changed, appreciating stock prices have resulted in sections of the media putting a positive spin on PSU bank stocks with experts stating “You can’t do away with SBI. If it’s not in our portfolio, we are missing out on India’s economic growth…” and so on. To clarify, such instances of rapidly changing positions are common in media.

Is this a case of mala fide intent? Not at all. This is simply the nature of the beast; media covers events in a manner that will appeal to its audience. Investors choosing to treat media coverage as investment advice, and acting on the same, only have themselves to blame.

Should We Shoot The Messenger?

Does the solution lie in insulating oneself from media? I don’t think so. Media can be an excellent source of information and updates. Following reputed channels and publications can help stay abreast of events. That’s where investors must draw the line.

I’m not suggesting that every investor must engage an adviser. There are several who are conversant with the nuances of investing, and don’t need to engage an expert.

As for investors who need assistance, but have never paid for investment advice, admittedly it can be a difficult threshold to cross. But there’s a need to weigh up the downside of a misguided investment versus the cost of acquiring prudent and expert investment advice. 

In any case, relying on media for investment advice seems like an imprudent choice.

Direct Plans: Much Ado About Nothing

Admittedly, when I first heard someone complain about direct plans, I was surprised. But over time, the negative buzz has only grown. A few months ago, I met some individuals who are engaged in mutual fund distribution. Their grouse was that introduction of direct plans has resulted in a significant loss of business for smaller distributors like them. They were convinced that it was only a matter of time before all mutual fund investors migrated from regular plans (wherein the expense ratio includes distribution expenses, commission et al) to direct plans.

Then there were investors who were unhappy with their investments in direct plans. They maintained that direct plans were responsible for their woes. Things came to a head last month when SEBI issued a circular mandating that fund houses disclose information regarding commission paid to distributors, among others. Some concluded that this was a sly move to promote direct plans at the cost of regular plans.

In all the aforementioned cases, direct plans were painted as villains of the piece. But do those arguments hold weight?

       

Let’s consider the first grouse: direct plans have resulted in small distributors substantially losing their business. As per data released by AMFI, as of Feb 2016, “39% of the assets of the mutual fund industry came directly. A large portion of direct investments were in non-equity oriented schemes where institutional investors dominate”.

It is common knowledge that most institutional investors were (and continue to be) serviced by large distributors i.e. distribution arms of banks, broking firms and distributors with a nationwide presence. So it can be safely stated that institutional monies flowing from distributor mode to direct mode hasn’t had a significant impact on small distributors.

Now let’s focus on retail investments i.e. the universe largely catered to by small distributors. AMFI data reveals that of the total industry assets (INR 13.5 trillion), roughly 44% were held by individual investors; of these just 13% were invested in direct plans.

It is noteworthy that direct plans with a lower expense ratio have been on offer since Jan 2013. In other words, even after more than 36 months, a bulk (87%) of retail assets continue to be invested via distributors. The much-feared and speculated exodus of retail assets from distributor to direct mode hasn’t taken place.

The second grouse—investors expressing dissatisfaction with direct investments—has its roots in a half-baked understanding of how direct plans should be utilised. After they were introduced, benefits of direct plans (lower cost versus regular plans, and thereby higher performance potential) were universally extolled. Expectedly, some investors decided to invest independently, and chose direct plans over regular plans. However while doing so, several overlooked an important caveat: direct plans are meant for informed investors who can make investment decisions independently.

Not all investors who severed ties with their distributors were capable of investing prudently. To further complicate matters, their chosen alternative for the distributor—experts in media—left a lot to be desired. Experts offering generic opinions on investing in the media doesn’t necessarily qualify as investment advice.

A distributor offering advice based on the investor’s risk profile, investment objectives and horizon cannot be substituted by a media talking head. The need for robust investment advice was accentuated in the last 18 months or so, when markets were at their volatile best. Sadly, some investors have erroneously chosen to blame direct plans for their woes.

The merits of direct plans are indisputable. Indeed, their introduction has gone a long way in democratizing mutual fund investing. 

For investors who need investment advice and services, engaging a distributor and investing in regular plans is a viable option. Conversely informed investors can utilise direct plans and benefit from lower costs. The onus of making the apt choice lies with investors.