Understanding Volatility & Value Investing for Long-Term Wealth with Ashish Somaiyaa

Ashish Somaiya: Toh, mujhe ek baar kisi vice person ne bola tha ki bhai agar tumhe wealth create karni hai, toh ho sakta hai ki tumhe 15 saal lag jaaye, lekin agar tumhare paas jaldi ho, toh 25 saal lag sakte hain. Jab main logon se pucha jaata hoon, toh main unhe yeh batata hoon ki agar tumhe yeh nahi pata ki kya kharidna hai, toh market kharid lo. Agar aapke paas zero thematic funds hain apne portfolio mein, toh kuch bhi miss nahi karenge aap. Hamesha ek theme mein invest karna chahiye, jab wo teen chaar saal tak kafi bura perform kare. Main sochta hoon, hum small cap aur mid cap pe kaafi bullish hain. Main yeh nahi kehta ki best performing fund chahiye, hamesha sahi fund chahiye. Aur meri rai hai ki hamesha consistency wali equity fund mein invest karo.

Ashish Somaiya: Equity ka market 1,80,000 crore se zyada 40 lakh crore tak gaya hai. Toh yeh 12 saalon mein 20 times badh gaya hai. Last three years ki performance ko next three years ke performance se compare karo, toh aapko koi correlation nahi milega. Aapko consistency chahiye, aur aapko aise managers chahiye jo consistent ho. Sabse zyada return performance ka acha indicator nahi hai. Consistency yeh hai jo log enjoy karte hain compounding ke liye.

[Music]

Vivek Ananth: Hello everyone, welcome to another episode of Bazaar & Beyond, where we deep dive on subjects ranging from finance, investments, and more to help you make smart investment decisions. And I’m your Vivek Ananth, Vivek Ananth. Our guest today, Mr. Ashish Somaiya, has over two decades of experience in the mutual fund industry. He is the CEO of White Asset Management. For the last 5 years, he has been driving White Mutual Funds' investment philosophy and creating differentiated investment products. Before that, Ashish was the CEO and MD of Motilal Oswal AMC for nearly 8 years. Thank you so much for being with us, Ashish.

Ashish Somaiya: Thank you, thanks for having me.

Vivek Ananth: So, I want to start off with your journey in the AMC industry. You've seen it since the 2000s, and from where you used to charge exit loads, entry loads, and the SEBI rules have changed a lot. How has your journey been? How have you seen this industry evolve over so many years?

Ashish Somaiya: A lot of things have changed. I think this year I finished 25 years in the industry, and what I've seen is, like I said, a lot of things have changed. But if I identify the prime things, the major changes and turning points, I think I’ve classified them into three parts.

The first thing that changed was in the late 90s, when I was a trainee in ICICI, I used to meet a lot of investors. In the late 90s, investing in mutual funds, equities, and capital markets, I would almost say, was not even required. I’ll tell you why — because at that time, the interest rates were such, like RBI used to issue Government of India Relief Bonds, you know, there was a kind of a series of bonds issued by RBI on behalf of the government to raise money for the government. You’ll be surprised to know, probably, if you don’t know, it used to pay about 11%. And 11% was tax-free, and because it’s the Government of India, it’s risk-free. So, in India in the late 90s, the risk-free, tax-free rate was 11%. If you put money in the post office, they would give you a monthly payout at 10% annualized, monthly payout. If you take State Bank of India, I think the deposit rates would have been 10%. If you take institutions like HDFC, they were borrowing at 16-17%. If you put money in company deposits, they were paying more than 20%. So, that’s one thing. Now today, if you see, the risk-free rate, that 10-year bond is 6.3%, and there’s nothing called tax-free. So, that’s one major change, which is causing people to constructively look at capital markets and equity.

Ashish Somaiya: The second change is obviously digitization, right? Because today, if I hear about you, and I’m impressed with you, it will take me 5 minutes to become your client and I can start trading, right? Or buy or invest in mutual funds. Back then, I mean, everything was like heaps and heaps of paper. You would stand in a line, collect some papers, sign the papers, submit a form, then it would come back to you, right? So, digitization, regulation, all of that. And the third thing which has changed is like a problem in English, which basically says that habits change with generations. So, for example, today, a 22-year-old, if you tell them to invest in the post office, they’ll say, “Arey yaar, the UI/UX is so bad, I can’t do it!” So, structurally, the decline in interest rates, that’s changed. Digitization, and the generation — people’s education levels, awareness levels, their preferences, everything has changed.

Ashish Somaiya: So, how has the investor mindset changed from when you started to today? What do you think about it?

Ashish Somaiya: Obviously, mindsets are built out of experiences and beliefs, right? So, let’s put it this way: when I was 25 years old, which is a very long time back, like in the late 90s, the kind of things we saw were completely different. You guys now watch OTT content about scams like "92" or "Abdul Karim Telgi." For today’s people, it’s a story, like, "Oh my God, that’s how it happened." But for me, I’ve seen it in the front page of newspapers, and I’ve read about it as it developed. So, what happens is that the mindset back in the late 90s was completely different. If you were investing in the stock market and you lost money, people would say, "Why are you in the stock market? The Government is giving 11%!" So, only people who had money to gamble or people who had finished all their investments would go to the stock market. Because if the risk-free rate was 11%, who needs to go to the stock market?

Ashish Somaiya: So, people who went into the stock market were the ones who were risk seekers. And in some ways, it was considered a get-rich-quick scheme. It was considered speculative, and if you lost money, it was a concern. People would say, "Why did you go there?" This was in the 90s. Today, if you see, investing in the stock market is mainstream. I mean, everybody invests. And you know, if the market goes down by 10%, 15%, or even 20%, like it happened recently, or in 2022-2023, it’s understood that it’s a feature, not a bug. It’s perfectly fine. I mean, today, if a 22-year-old puts money in the market and loses 15-20%, I don’t think it will be considered gambling. It will be considered part of the learning process. So, the regulations we have today, the technology we have today, and more importantly, people who are young today, their education, their socio-economic background, their knowledge levels, their country’s vision, everything has changed.

Vivek Ananth: How do you think this change will affect the future of the mutual fund industry, specifically from an investor’s perspective?

Ashish Somaiya: I personally feel that, you know, I mean, what I find most appreciable about our industry is that our regulator is very proactive. For example, just last month, or a couple of months back, our regulator made it mandatory that for every equity-oriented fund, we are supposed to disclose something called the Inflation Ratio. Now, what happens is that everyone looks at past returns, the tendency is to look at one-year, three-year, and six-month performance. So, people look at past performance, and the fact is that once one of my friends did an analysis and found that the top-performing fund over the last three years is the one where people put their money. So, they look at what did well in the past and then invest in that. But the next three years, when I am in that fund, will it be in the top? There’s no correlation. That’s why the regulator says past performance is not an indicator of future performance.

Ashish Somaiya: Now, what the regulator has made mandatory is the disclosure of something like I said, the Inflation Ratio. This inflation ratio is basically a measure of consistency. Meaning, how much did you outperform the benchmark divided by the standard deviation of alpha? Meaning, how much does it fluctuate? So, I will give you a cricketing example. Imagine you’re building a cricket team, and all the batsmen have an average of 45+. You take that team to a competition and you feel like, "We are going to win; this is the best team." But when you go, you realize that only one or two players out of the team score over 45, while the rest get out for zero. The average is above 45, but the reality is different.

Ashish Somaiya: So, if I tell you to choose two batsmen, one whose average is 45 and another whose average is 50, the one with 45 has a worst score of 20 and a best score of 70 or 75, meaning they are a consistent player who never gets out for a duck. On the other hand, the player with the average of 50 has been scoring zero in the last 5 innings but has also hit multiple double centuries. So, if it’s the fourth day of a test match, who will you send as a night watchman? Obviously, the first player who is consistent. This is what the inflation ratio is — it’s a test of consistency.

Vivek Ananth: That makes a lot of sense. Now, moving on to the next topic, let’s talk about the active vs. passive debate. What is your take on it, especially from the perspective of retail investors?

Ashish Somaiya: Well, obviously, active and passive both have a place in people's portfolios. I personally feel that passive funds, especially index funds, are easier for retail investors to start with, especially for beginners who are not sure where to start. A simple example I always give people is that if you don’t know what to buy, you buy the market. It’s like one of the first funds I created in my previous role — Nifty 500 and S&P 500. Now, think about it: these funds’ minimum investment is ₹100. If you can invest ₹100 or ₹500, you can buy the Nifty 500, which represents almost 95-96% of India’s market cap, or you can buy S&P 500, which represents global companies. I think about 40-50% of their profits come from America, and 40-50% come from global markets. So, you can buy India’s market and global stocks, and that’s the simplest way to start your investment journey.

Ashish Somaiya: So, after you start with broad-based index funds, the question arises — what is the role for active management? What happens is that when you talk about active management, most of the time, the debate turns to whether active or passive is better. But after a couple of minutes, the debate will move towards the U.S. because, in the U.S., there is no alpha anymore. Ultimately, we will also go that way, and our alpha will disappear as well. That’s where I disagree. I personally don’t believe that the Indian market is yet comparable to the U.S. experience. Let me give you three examples:

Ashish Somaiya:In the last 30 years, India’s market cap has gone up five times. I think it  was 13 trillion at its peak, and now it’s around 65 trillion. But when the market cap increased five times, the number of listed companies decreased by 40%. So, the "Magnificent Seven" big companies are dominating, while literally, the number of listed companies has gone down by 40%. Back in 1995, there were over 7,000 listed companies, and today, that number hovers around 4,000.

Ashish Somaiya: India, at its peak, is at 5.2 trillion. We have more listed companies than the U.S., and even today, we have more listed companies coming to the market than in the U.S. Is that a good or bad thing? It’s neither good nor bad. It’s about active management. So, what happens in the U.S. is that if you are an active manager, what’s going on in your investment universe is that it’s shrinking. Your corpus is growing, but the available investment universe is shrinking. And what’s left in the universe are mega caps and large caps, which obviously have more research coverage and are more efficient. But in India, the active universe is expanding by leaps and bounds. The companies coming to the market are growing rapidly, and for active managers, this is a great opportunity.

Ashish Somaiya: This is the difference. In the U.S., when you go for active management, your universe is shrinking. In India, it’s expanding. So, that’s why I am very bullish on small-cap and mid-cap stocks. If you look at any of our open funds, we believe that we can deliver absolutely great alpha in small-cap and mid-cap, because of our ability to do stock-picking. But yes, managing a small-cap fund in an open-ended format is a bit tricky. That’s why we don’t do open-ended small-cap funds, we focus on closed-end funds.

Vivek Ananth: And how did investors react when you decided not to go for open-ended small-cap funds?

Ashish Somaiya: Oh, there was a big price to pay. If I forget about being the CEO of a mutual fund company, and think about it from a business hat, it’s a big price to pay. For example, in the last two to three years, 40% of the money that went into small-cap mutual funds was from our competitors. So, our team would say, "You’re not even giving us a chance to invest in these kinds of funds." But then, when you take that decision, it’s not about avoiding risks, it’s about protecting the investor and protecting our brand. We want to make sure that people don’t have a bad experience.

Ashish Somaiya: If you see the data, you will notice that the small-cap funds are huge, with sizes of ₹20,000 to ₹50,000 crore. There aren’t enough stocks to buy for those funds. So, as the assets under management grow, it becomes harder to adjust the portfolio. That’s why we have insisted on only taking SIP investments in small-cap. Even in mid-cap, timing is a problem, and you can’t control it. The only thing you can do is SIP, and even if the timing goes wrong, you’ll still average out your performance rather than trying to catch peaks and getting disappointed when the market goes down.

Vivek Ananth: That makes sense. Now, moving to the topic of thematic funds, many investors are drawn to them because they are often promoted in the media. What’s your take on these kinds of funds?

Ashish Somaiya: There’s nothing you’re going to miss out on if you have zero thematic funds in your portfolio. For most people, like I said, a couple of flexi-cap or multi-cap diversified funds do the job. There will always be some investors who are more inclined towards thematic funds, but not all products are relevant for everyone. For example, if you are an aggressive investor and you believe that healthcare is an industry set to grow, you might want to invest extra in a thematic healthcare fund. But if I am an average investor, I don’t necessarily need to go into thematic funds.

Ashish Somaiya: People tend to go for products that are performing well in the short term. If they see one fund doing well, they will invest in it, thinking it’s the best. But what they don’t realize is that thematic funds can be a bit like fashion. For example, in 2022-23, instead of buying industrials or small caps, you could have been investing in PSU banks. But when macro conditions change, those themes will change too. So, if you are diversifying, it’s much safer. Thematic funds are good for those who have a clear belief in one theme, but they are not suitable for everyone.

Vivek Ananth: So, for investors who are looking for thematic funds, should they be careful about the timing and long-term potential?

Ashish Somaiya: Exactly. One thing I always recommend is that you should invest in a theme only after it has done badly for 3-4 years. If a theme has been booming for the last 3-4 years, it’s not the right time to invest in it. You should also make sure that you’re not investing in a very narrow sub-sector. For example, a fund focused only on "transportation and logistics" might not be a great idea. Instead, you should look for broader themes with more scope and a more diversified risk profile.

Vivek Ananth: So, Ashish, now moving on to the next topic: The future growth of the mutual fund industry in India. Where do you see this industry evolving? Is it growing more in terms of investor numbers, or do you see any other key drivers for growth?

Ashish Somaiya: The industry is definitely growing for a few key reasons. First, existing investors are becoming more confident as they see good returns on their investments. Their ability to invest more increases, which in turn, increases the AUM of the industry. So, one of the growth drivers is the increasing wallet share of existing investors, which also means that their assets are growing.

Ashish Somaiya: The second factor is how well the industry is performing, meaning how much appreciation we are delivering in portfolios. When investors see their portfolios growing, it increases their confidence and trust in mutual funds. And the third driver is the new investors that are coming in.

Ashish Somaiya: If you look at the data from the last few years, the market has grown at around 14% compounded annually since 1991. Similarly, the returns from good mutual funds have also grown more than the market itself. The exciting thing here is that we are seeing a lot of new investors entering the market. So, it’s not just about the existing investors, but also the inflow from newer investors who are coming in and boosting the industry growth.

Vivek Ananth: That’s quite insightful. But there are some who are still unsure about the future performance of the mutual fund industry, especially with all the changes in the market dynamics. How would you address that?

Ashish Somaiya: Well, I think the most important thing to remember is that there will always be short-term volatility. In fact, equity investments in mutual funds have gone from ₹1.80 lakh crore to more than ₹40 lakh crore in just 12 years. That’s more than 20 times the growth in a very short period of time. And in that kind of growth, there are bound to be ups and downs.

Ashish Somaiya: But the key takeaway here is consistency. Investors need to stay invested for the long term. If you focus on short-term fluctuations, it can lead to bad decisions. So, as long as you remain invested in a diversified portfolio, even during market corrections, over time you will see returns that will meet your financial goals. The mutual fund industry will continue to evolve, and growth is inevitable as the market and economy continue to expand.

Vivek Ananth: So, consistency and long-term focus are key. That brings us to an interesting point — what should investors look for when evaluating funds? How do they assess whether they’re in the right fund for their goals?

Ashish Somaiya: Great question. When you’re looking at a fund, it’s very important to focus on consistency, not just the highest return. Highest return can be misleading, as we’ve seen with many funds that performed well for a short period of time but then crashed.

Ashish Somaiya: Consistency is what matters. You want a fund that can deliver steady performance over time, even if it’s not the best performer in any given year. I always tell people that if you’re looking to invest, it’s more important to find funds that have consistently performed over the long term, rather than jumping on the hottest performing fund for a single year.

Vivek Ananth: So, it’s more about the long-term consistency rather than chasing short-term performance?

Ashish Somaiya: Exactly. If you have a consistent performer in your portfolio, you’re likely to get the compounded benefits of long-term growth. It's similar to a cricket analogy: you don’t need a player who scores a century every match, but a player who consistently scores over time is valuable. Similarly, in mutual funds, consistency is what helps you build wealth over the long term. That’s why the best investors often look for funds with a strong track record of consistent performance.

Vivek Ananth: That’s great advice. Before we wrap up, could you share with us a bit more about your thoughts on the increasing interest in thematic and smart-beta funds? Is this trend here to stay, and what should investors know before diving into these?

Ashish Somaiya: Yes, thematic and smart-beta funds have gained a lot of traction lately. The trend is here to stay because investors are looking for more targeted investments in areas they believe have high growth potential.

Ashish Somaiya: But the thing to remember is that thematic funds can often be more volatile. They’re more sensitive to specific sectors or trends, and when those trends don’t perform well, these funds can see significant declines. So, thematic funds are great if you have a strong belief in a specific theme and are prepared for the volatility.

Ashish Somaiya: But for most investors, I recommend sticking with broad-based diversified funds. They offer less risk and more stability. You can always use thematic funds as a small portion of your portfolio, but don’t put all your money into them. Balance is key.

Vivek Ananth: That makes perfect sense. Thank you so much for these valuable insights, Ashish. I’m sure our listeners will benefit greatly from hearing about your experience and expertise.

Ashish Somaiya: Thank you for having me. It’s been a pleasure.

Vivek Ananth: Thank you so much, Ashish, for being here today and sharing all of these insights. Before we finish, do you have any final thoughts or advice for retail investors, especially those who are just starting their investment journey?

Ashish Somaiya: Absolutely. The key advice I always give is to start early and stay disciplined. The earlier you start, the more you benefit from compounding. But the most important thing is consistency. Don’t get swayed by short-term market movements. Markets will go up and down, but if you remain consistent and stick to your plan, over the long term, you’ll see positive results.

Ashish Somaiya: Also, don't try to time the market. It’s impossible to predict where the market will go in the short term. Instead, invest regularly through SIPs, keep a long-term perspective, and focus on building a diversified portfolio. These simple practices will help you build wealth steadily.

Vivek Ananth: That’s some great advice. So, to all our listeners — start early, stay consistent, and focus on the long-term. Thank you once again, Ashish, for taking the time to share your wealth of knowledge with us.

Ashish Somaiya: Thank you for inviting me. It was great being here.

Vivek Ananth: And with that, we wrap up today’s episode. I hope you all found this discussion as insightful as I did. If you enjoyed the episode, don't forget to like and share this with your friends and family. Subscribe to our YouTube channel for more episodes like this, and remember to invest wisely.

Stay safe, keep learning, and happy investing!

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