PICTURE SPEAK

Andrew D. Wells: CIO, Asian Fixed Income, Fidelity International

Wells: Don't get sucked into chopping and changing very frequently because the quick short-term gains don't count. How do you tell investors who have experienced incredible returns from equity that 6-8 per cent is good return (from debt)? Investors can lose money on excessive trading. You can't say how much is excessive, but often retail investors are not the first people to hear about fashionable investments. The danger is that they get pushed from one thing to the next latest fad. Have your own set of liabilities, risk tolerances. People should aim at a mix of fixed income and equity and should not always expect the highest possible but, stable returns.

Matthews: The perception is that the market is going through a crisis. Since the beginning of the year the Indian market has been up by 18 per cent and that's the best return among all the markets. The US and UK are up only by a couple of percentage points. The volatility will seem more acute to less experienced investors, but the reality is that the opportunity is enormous. People must keep their cool and invest for the long term. Asset diversification is a must. It is easy to follow fashion and trend, but people who bought specialist funds paid heavily during the technology bubble burst. So one should invest in a portfolio to avoid being vulnerable to the economic cycle.

Q. What criteria should investors follow to select schemes?

Wells: Quality and track record of the institution is important. Pick a financial adviser with high pedigree. Credit spreads have been narrow and interest rates haven't been as volatile as in the past so the peer group has been in a relatively short spectrum of returns. We don't focus on the return itself but the quality of the return-the breadth of ideas, number and frequency with which you get them right. You can produce high returns with lowest possible risk. Some funds may produce exactly the same return as others but they would have done it in a very singular way. There's a lot of risk if that one investment idea doesn't click. If you have a large number of ideas you know that even if one doesn't work the others will and the returns will be controlled and the risk limited.

Matthews: Check the background of the organisation. How long has it been in the asset management business. How much money does it have under management. How large is its research team. How does it choose its stocks. What is the risk of its portfolio. Risk can be ascertained by looking at the number of stocks and sectors held. For instance, does a fund hold three large stocks and a number of small ones or is it diversified and has many stocks. It will worry me if the value of the portfolio goes up when the market goes up and falls on the downtick days.

Q. What would you tell investors getting tempted by fixed deposits?

NUGGETS OF WISDOM

Savings done for less than 3-5 years should be invested in debt Returns from equity are best over more than 3-5 years SIPs work only if investments continue through the downturn Go for stable, not highest returns using balanced investments Don't liquidate equity investments in one go, sell over time

Wells: First, an FD implies a certain amount of credit risk of the institution and all your eggs are in one basket. The other is liquidity. A great advantage of funds is that you can come in and go out. They have no lock-in like FD and fixed-income monthly plans (FMPs). In an FD or FMP you buy the investment, lock it up and then live with it until maturity. A fund is sensitive to market opportunities.

Matthews: Over the long term equities outperform cash. Money invested for less than three years can be put in FDs or fixed income. If a sum is being saved for more than three-five years then participate in equity with systematic invetment plans (sips). Stick with them in a volatile market. The way to make sips work is to invest through the downturns. If you invest only when markets are up you'll end up paying too much. The idea is to average it over the cycles.

Q. Why haven't Fidelity equity schemes, even the one-year-old one, got into the top performing Indian funds' list yet?

Matthews: Our target is performance over the long term. May and June have been highly volatile. We identify investment opportunities that are not obvious to less sophisticated investors. This often means investing in smaller, lesser known mid or small-caps which tend to be much more volatile. Over the long term the valuation and profit growth opportunities that have been identified will be reflected in the market. We are benchmarked to the BSE 200 and our performance has been in line with it. The special situations fund is even more aggressive and should be seen over a long term.

Q. What kind of investors should look at Fidelity's new fund?

Wells: The short-term fund is for investors who are looking for a low risk asset. There's income at relatively lower volatility. And if you're looking to be at the short end of the yield curve. At the moment certain risks (like inflation) are associated with the longer end of the yield curve. The short-term fund is focused on people who have slightly higher risk aptitude and longer horizon than cash and can take a little volatility in NAV. I'd say around six months is the time we're looking at.

Q. Is the recent spurt in close-ended schemes a reflection of investors' coming of age or an attempt from fund-houses to reintroduce the concept in India?

PICTURE SPEAK

Kathryn Matthews CIO, Equities, Asia Pacific, Ex-Japan, Fidelity International

Wells: Some companies have seen that they can compete with FDs with a fund that on day one indicates the yield that will be returned to the investor on maturity. So it's a much easier product for people to understand if you have that headline yield on that. I'm not a great fan of the product itself because the focus is only on the headline yield it will be giving and the business moves on. I'm not sure if it's investor-led. It's probably more industry-led.

Q. Equity investments yield good returns over the long term. What strategy works best for debt investments?

Wells: Debt investors don't need to be as patient as equity investors. Invest if you're looking for stable returns and income. Income comes almost immediately on an accrual basis. Where you may have to be more patient is interest rate cycles. If it goes up then it takes some time for the interest rates to come down again and more value to be added to that fund. In fixed income there isn't really the same kind of long-term horizon as equities. It is more about asset allocation or risk tolerance.

Q. When is it a good time to enter and exit an equity fund?

Matthews: With equity you have to take a long-term approach and accept that there will be volatility over the short term. It is very difficult to say today is a good day to invest. Rather invest regularly, hold for the long term and buy diversified. Liquidate the same way like you invest through programmed selling leading to the time when you would need the money. Don't sell a day before you need the cash.

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