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MF industry’s top CIOs – Chirag Mehta, CIO & Fund Manager, Quantum MF, Mihir Vora, CIO, Trust MF, Rahul Singh, CIO- Equities, Tata MF, Santosh Singh, Fund Manager, Motilal Oswal MF have an interesting take when asked if AI posed a threat to their job.
They were of the opinion that economics and markets are too complicated. An AI model may be able to predict a trend but it may not be able to predict inflexion points. They also questioned how the AI models will predict patterns in stock markets. In AI, the machine has to learn first. It needs a constant stream of data for that in a pattern. But the one thing about behavioral aspect of human beings is that it doesn’t follow a pattern.
This was discussed in a panel discussion at Cafemutual Ideas Fest 2024 on future of equity investing. Prem Khatri, Founder & CEO, Cafemutual moderated this esteemed panel. Here are the key highlights of the discussion:
The evolution of fund management over the years
The CIOs emphasized on the increase in investment opportunities now. Newer sectors are emerging, which has brought new opportunities. Although it will be difficult to find the next leg of growth, the CIOs are trying to stay ahead of the curve with the help of data.
Impact of scale of the MF industry on CIOs
The CIOs shared how over the last few years, mutual funds have become an alternative to normal savings and fixed deposit. So, there is no place for investment style bias anymore as more retail investors are putting their money in mutual funds. It is not possible to tell them that the fund will underperform for the next few years. Hence, risk management has become very important to stay ahead of the market.
Finding options in an oversaturated market
The CIOs stressed on how small cap and mid cap is a bigger space than large cap based on the number of companies and gives better options for investment. When asked about the liquidity and impact cost issues of companies in these sectors, the CIOs advised to take a contrarian view and to stay ahead of the curve by buying early. They also discussed how being early in selling can give selling liquidity.
Dealing with pressure to stay ahead of the curve
The CIOs talked about process and philosophy and how the fund management plays important role in it. They also opined that too much risk can hurt a fund manager in the long term. CIOs should look to give investors a predictable performance where they can look at the market performance and are able to tell how the fund has performed based on that.
Eventually, it’s about process and following the process. If a CIO is consistently doing what he is telling his investors then long-term performance is going to follow.
Analysing performance of a fund management team
The CIOs advised to give higher weightage to outperforming the benchmark. If a fund keeps doing that, it will stay on top over a long-term period. They also asked to give equal weightage to long-term and short-term performances.
Risk management team is not an adversary
The CIOs asked the fund managers not to look at the risk management team as an adversary. They also discussed how certain risk management parameters like governance and liquidity are non-negotiable. As the size of the funds grow, the portfolio also grows. This is where liquidity becomes important. There are stocks that take a long time to liquidate, which is not good risk management. It is the duty of fund managers to take care of the risk hygiene.
Choosing between lump sum and SIP in small cap & mid cap funds
The CIOs expressed confidence in the state of the Indian economy compared to other countries. They asked investors not to wait for a major correction in the next 1-2 years. A black swan event or small corrections may happen but economy is still solid. They also advised to choose hybrid funds for lump sum investment.
They also talked about the many pockets of opportunities besides the index. So, rather than blindly investing in equity market through index route, active management can play a bigger role and as more sectors are performing in a broad-base rally, active management has better scope for outperformance.
Watch the entire session by clicking here or visiting our YouTube Channel.
