The kind of things that an investor needs to understand for a long-term portfolio are the current market triggers which are panning out in terms of domestic as well as international triggers. What is your understanding of the interest rate scenario? Will this interest rate hike continue or do you see another rate hike coming up?
I do not have very strong views whether we are at the peak of the cycle or we could see maybe one or two rate hikes in the coming days. What is clear in the current environment is that we are clearly not in the very, very low interest rate regime that we saw globally as well as in India. Rates have moved up in terms of nominal rates as well as now you will start seeing real positive returns to investors. People who are moving away from fixed income securities in chase of real yields or in terms of not getting negative real yields on their investments, do not have to do that anymore. And fixed income is becoming an attractive asset class for people who have short to medium term needs. That is the way we are looking at it.
A lot of the fixed income investors have revamped or reshuffled their exposure when it comes to equity and debt. Do you think there is still a scenario where they can consider medium to long term duration investment or should they stick to short-term parking of funds in any fixed income right now?
I do not think we are going down in a hurry in a very big way, given that inflation concerns have not gone away and inflation rate remains somewhat elevated. So people who are looking to buy very long term bonds in the expectation that rates could come down and they could make some short term returns in terms of bond prices appreciating, I do not think that’s a great thing to do. People who have longer term debt needs as far as part of their core asset allocation, could consider investing some of their funds in such instruments. But otherwise, I would recommend sticking to the short to medium term debt instruments. If someone has extra long-term money, equity would be a better place to park.
What is your analysis on the corporate earnings that we saw in the first quarter? What is your view about the rest of the quarter? What kinds of triggers do you think, if at all, an investor wants to have a sectoral exposure and is looking for a time horizon of 3-5 years?
Results were more or less good across the board with certain sectors being exceptions. So easing of input prices, commodity prices were good for a broad set of companies. But people in this space saw muted earnings. We saw some sectors contributing positively in a big way, especially the banking and financial services companies and oil companies to some extent. So, broadly the results were more or less in line with expectations and results were looking good.
In terms of different sectors and where we see them at this point in time, consumption oriented names, both discretionary and non-discretionary as well as retail focused names are looking very expensive at this point in time. There are select PSUs or banking names which are looking attractively valued now.
One very specific question that the investors are also worried about, is the midcap and smallcap space. Talking about investing through mutual funds, they are seeing good and fat returns on their portfolio right now. One needs to be diversified across market caps, but do you think it is time to wind up your slight exposure in mid and smallcaps and relocate to largecaps?
What one sees across cycles is that when markets are rising, midcaps do better than large caps and smallcaps do better than midcaps. In falling markets, it reverses out. Midcaps fall faster and smallcaps even faster. Recently, small and midcap returns have been very, very high and that has resulted in a lot of retail investors chasing funds and investing in this space. A lot of asset management companies are actually taking steps to shut their doors to fresh inflows and restricting inflows, which is a clear indication that somewhere things are getting a bit out of hand. Broadly, we should diversify across market cap. But if someone is extra invested in the small and midcap space, it may be a good time to consider shifting to the largecap space.One word of caution, if you have to give to the investors investing in smallcaps, what would that be?
Do not chase returns very, very simply because many times the returns may be illusory. You may, based on NAV, think that you have earned very decent returns but that NAV could fall equally sharply the way the rise has been.
One important question, how worried or concerned are you about the elections and its impact on the market?
Not too worried. Broadly across parties and across governments, there is basic consensus on how the economy has to be run. And in the past, people in the equity markets have not got the election results right, both in India and globally. And even if they knew the election results, they do not know what the market reaction after that will be. So three months before the election and maybe one month after that, there is this turmoil. But if one can live through these four months and now the rest of the quarter,nths, I do not think the election will have that big impact on the markets.
I want you to help investors understand the kind of diversification strategy that they should be following. A lot of experts, especially on social media, keep bombarding us with a lot of strategies. Obviously, it is very case-specific. It depends on your financial goals and the kind of risk appetite you have, the kind of risk profiling you have done. We have a good number of hybrid funds that a risk-averse or an aggressive risk investor can invest into. There cannot be a one-size-fits-all kind of a strategy but basic principles of diversification. What would that be?
Firstly, people need to have an appropriate mix of asset classes in their portfolio. You rightly mentioned it depends on the individual’s life stage, goals, risk appetite and things like that. But broadly, one should have liquid funds, which could be in liquid mutual funds or it could be in terms of short-term fixed deposits or things like that. One will have medium-term debt investments that would be real estate and to some extent gold, depending on people’s need for those asset classes, real estate for primary residence or business purposes or gold in the form of jewellery, etc.
Obviously equity is there as the growth asset class and for wealth creation. So across these asset classes, there should be diversification. Coming to debt and equity, you cannot put all your debt investments in one corporate FD and think that that is fine. It has to be either in very low-risk investments like government and AAA bonds. And even there, some diversification is required in terms of number of issuers, in terms of AAA bond issuers. In equities, if you are going through the mutual fund route, one or two or three mutual fund schemes should suffice because the mutual funds themselves are diversified vehicles. But if you are holding direct equity, then you may need a minimum of 15 to 20 companies to spread your investments.
