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When going is good, everyone is happy. But, when the tide turns, that is when investors behave irrationally. Discussing client interactions, Motilal Oswal AMC fund managers highlighted how they deal with difficult questions coming in from the investors.

“Some investors ask about six-month or one-year IRR. We explain to them the ‘Buy and Hold’ style of investing. When we create a portfolio, we do it on a three-year rolling basis. The stock-picking is based on fundamentals not technicals. Let the whole growth journey of a company play out. That is what we tell them,” said Manish Sonthalia, Executive Director, Fund Manager AIF & PMS at Motilal Oswal AMC.

“Markets are sizzling. Investors want to become rich quickly. That’s dangerous,” he added.

Volatile markets

Markets are volatile. It never moves in a linear fashion. “I explain my clients that markets are like ketch-up. Just as ketch-up will never come out in a straight line, similarly markets will not move in one direction. The gains in equities come in spurts the way ketch-up comes out of the bottle,” said Susmit Patodia, Associate Director, Fund Manager, Motilal Oswal AMC.

Giving an example, Patodia pointed out the diversion in valuations of midcap and largecap IT stocks.

“We had highlighted last year in the same summit to buy midcap stocks. Mid and smallacap IT stocks were trading at 25% discount to largecap IT stocks, but now they are 30-40 per cent premium to them. A sudden jump in a year has happened. Similar situation may pan out in other sectors. We want things to stand in centre but markets move in a pendulum motion,” he said.

Chase process over momentum

Following a process is more important than chasing returns. Explaining the phenomenon, Senior Group Vice-President and Fund Manager Aditya Khemani said that if a mutual fund is the best performer in all the cycles, there must be something wrong with its process or rather it won’t have a process at all.

“Clients expect good returns, and good returns at all points in time. That is where the disconnect is. We need to educate them that trading and investing are two very different concepts. No investment strategy can perform at all points in time. Mutual fund can also become a trading business. But it should not happen. One should stick to a process. Sometimes it will perform, sometimes there will be underperformance, but performance will come spectacularly when it does,” he said.

Giving an example, he says, a lot of people asked him as to why he doesn’t hold RIL in the portfolio.

“Such questions were raised in 2020 when RIL skyrocketed. I was clear in my investment thesis that I cannot be a momentum chaser. RIL did not fit into the process that I follow. There was no point getting into it to gain the last bit of 10-20% returns,” said Khemani.

Explaining the underperformance in the Motilal Oswal Focused 25 in last one year compared to category peers, Executive Group Vice President and Fund Manager Siddhartha Bothra explained that in the life of a fund, there will be some periods when it doesn’t do well.

“The focus of this fund has been economy-linked, growth-oriented companies on the defensive side. Our priority is top-rung management. The fund was an outperformer in the past. What we were doing then is exactly what we are doing now. We did face a tough time in the last one year, but our philosophy is the same and we’ll come out of underperformance,” he said.

The crux remains that the short-term approach in equities doesn’t work. One has to live through the business cycle to create wealth.