“Regular stress tests are crucial for AMCs to navigate market fluctuations and maintain investor confidence”

In this exclusive interview, Deepak Ramaraju, Senior Fund Manager at Shriram Mutual Fund opines that regular stress tests are crucial for AMCs to navigate market fluctuations and maintain investor confidence. This is a positive step, strengthening the stability of the mutual fund industry.

With the year-end tax-saving season approaching, could you share insights on the key benefits of the ELSS Tax Saver Fund for investors looking to save taxes while investing?
ELSS, or Equity Linked Savings Schemes, is one of the favoured tax saving instruments. This offers multiple benefits to individuals:

• Tax deductions of up to Rs 1.5 lakh under Section 80C by reducing taxable income
• Lesser lock-in of 3 years in comparison to Bank FD or PPF or NSC
• Higher return on investments in the long term in comparison to Bank FD, PPF or NSC
• One can start with a minimum of Rs 5,000 (lump sum) or with a minimum of Rs 500 (via monthly SIP)

It’s always recommended to do tax planning at the beginning of the year and spread the investments during the year in the form of SIPs.

What are the key sectors or themes you are exploring at the moment and how does it adapt to changing market conditions?
At the moment, key sectors and themes in equity markets include healthcare (pharmaceuticals), financial services (fintech and digital payments), automobile (EV/Hybrid vehicles), energy (green hydrogen), infrastructure (roads, railways, and urban infrastructure) and renewable energy (solar and wind power). These sectors are experiencing significant growth due to government spending, technological advancements, changing consumer behaviour and global demand.

To adapt to changing market conditions, companies in these sectors are focusing on timely execution, innovation, digital transformation, and operational efficiency. They are also diversifying their product offerings and expanding into new markets to reduce risks associated with any single market or segment. Additionally, companies are enhancing their risk management practices and adopting flexible business models to quickly respond to market changes.
 

Could you please elaborate on the recently mandated stress test for mutual fund AMCs? What are your thoughts on the same?
SEBI has mandated stress testing for mutual fund AMCs on a quarterly basis to assess their resilience in adverse market conditions, aiming to protect investor interests. This proactive step ensures industry stability by helping AMCs prepare for risks and take necessary measures.

Regular stress tests and integrating findings into risk management practices are crucial for AMCs to navigate market fluctuations and maintain investor confidence. In our opinion, this is a positive step, strengthening the stability of the mutual fund industry.

As the manager of multiple funds, including Aggressive Hybrid Fund, Flexi Cap Fund, and others, how do you balance diversification and risk management across different fund categories?
Different types of funds have different return vs risk expectations. They are also compared against different benchmarks. For example, an Aggressive Hybrid Fund maintains a higher allocation to equities (65-80 per cent) for growth potential and holds a portion in debt instruments (20-35 per cent) for stability. The fund dynamically adjusts its allocation between equity and debt to optimise returns and minimise risk.

On the other hand, a Flexi Cap Fund balances diversification by investing across Large-Cap, Mid-Cap, and Small-Cap stocks. This diversification helps manage risk, with large-caps providing stability, mid-caps offering growth potential, and small-caps adding higher growth with higher risk. The allocation to Large, Mid and Small caps are altered dynamically to maximize returns and minimise risk.

The stock selection and allocation process in the case of both funds is driven by our proprietary Quantamental model. The Quantamental model focuses on a combination of both quant models and the fundamental way of stock selection. The quant model involves a multi-factor investment approach wherein factors such as low volatility, momentum and valuation are used to rank stocks based on factor characteristics.

Further, the top 50 ranked stocks are subjected to fundamental analysis and based on the fundamental aspect and quant inputs, the fund manager selects the stocks for the portfolio. The portfolio construction is done based on quant scores, potential upside and relative volatility of the stock with respect to benchmark and peers.

How important is investor education and communication in helping investors understand the benefits and risks associated with mutual funds?
Investor education and communication play a critical role in our industry. Investor awareness and education programs give clarity, facilitate effective risk management, encourage investors to focus on their goals, make them aware of the concept of diversification and managing risk, highlight the significance of costs and fees, inform them about the risks of market movement and ensure transparency. This empowers investors to make informed decisions that align with their financial objectives and choose the right product to invest.

If an investor wants to invest Rs 1 lakh in mutual funds, what would be your advice to them?
If an investor wants to invest Rs 1 lakh in mutual funds amidst high and volatile markets, one strategy to consider is a Systematic Transfer Plan (STP). STP involves transferring a fixed amount from a liquid or money market fund to an equity fund at regular intervals. This approach helps in averaging the cost of investment over time, reducing the impact of market volatility.

Additionally, it allows the investor to gradually enter the equity market, which can be beneficial during uncertain market conditions. However, it's essential to consult a financial advisor to determine the suitability of STP based on individual investment goals and risk tolerance.

Looking ahead, what are your thoughts on the future of asset management and the role of technology in shaping this industry?
The future of asset management is set to be heavily influenced by technology, with several key trends already shaping the industry and expected to continue doing so. Quantitative analytics driven by AI and machine learning is revolutionizing asset management by providing data-driven insights that lead to better and faster decision-making.
 

Additionally, blockchain technology, initially associated with cryptocurrencies, is now being applied more broadly, including in asset management. It has the potential to improve transparency, reduce fraud, and streamline processes such as fund transfers and shareholder voting.

Looking ahead, the future of asset management is expected to involve greater integration of quantitative analytics and technology. This integration will lead to more efficient, transparent, and client-centric investment solutions, further shaping the industry's evolution.

Disclaimer: The opinions expressed above are personal and may not reflect the views of Dalal Street Investment Journal.