Invest in mutual funds to navigate the turbulent waters of today’s market
Capital markets have proven their resilience since the financial crisis of 2008. Whenever a crisis hits, they push to their limit and just when you think they are going to crack, they embark on a strong wave of recovery. .
The multi-year pandemic we are in now has led countries around the world, but also India, to test their sustainability beyond usual limits. Last year, the Bombay Stock Exchange (BSE) Sensex collapsed more than 1,000 points 14 times, with the biggest selling at nearly 40.00 points in March 2020. Fast forward to February 2021, and we’ve seen markets reach all-time highs despite concerns about an economic recovery.
As an investor, how do you approach this new standard of volatility and position your investment portfolio to generate the returns you expect?
In the latest episode of Mutual Fund Mantras, senior reporter Gautam Srinivasan caught up with A Balasubramanian, Managing Director and COO at Aditya Birla Sunlife AMC Ltd., to share his valuable information on stocks, mutual funds and the economic history of India at large. Some extracts:
Q. As clouds hang over India’s economic growth prospects, stocks appear to be basking in the sun. We are again near our peaks. What’s your reading of the current situation given your experience of past volatile times?
A. With 23 years of experience in the mutual fund industry, one thing I’ve learned is that change is permanent. With continuous change, one must cling to optimism on the basis of hope. At the start of the pandemic in April 2020, few people would have expected markets to rebound like they did. Historically, a similar trend has emerged. With each crisis, the markets first went down and then based on expected earnings and growth, the markets always rebounded. What we see today reflects this. The bullish trajectory remains constant but we have to go through volatility.
Q. Do you think the real economy needs to catch up with market optimism?
A. Optimism comes from 2-3 counts. First, growth expectations, which means that the purchasing behavior of consumers must change, that products must be sold month after month to a higher number, that spending must increase in order for the demand for goods to be created, so that companies sell more and make more profits. This is related to the overall gross domestic product (GDP) and the general assumption is that companies will experience growth above normal GDP. In addition, the power of capitalization used for investments in mutual funds also helps to boost optimism.
Second, the power of the money pumped into the system by the Reserve Bank of India (RBI) right now is more than I have ever seen. The money eventually leads to a return to growth, and with that, the profits start to come back. So it starts with hope and optimism, comes growth and then consolidation.
Q. With growth also comes inflation. While the central bank could have encouraged growth, wholesale price inflation peaked in 11 years at 10.5% in April. What power is left for policymakers to contain such surges and what will be its impact on India Inc?
A. Inflation is a function of the supply and demand for every product that works. Over the past year, commodity prices – especially metal prices – have increased significantly. Inflation benefits goods-producing companies. But for industries using metals like automobiles or construction, it could increase input costs. And, when the absorptive capacity of companies declines, it impacts the stock markets.
Today we have a scenario where capacity is limited, but this demand is increasing mainly because governments around the world have invested trillions of dollars in building infrastructure in order to create demand for certain products of base, thus leading to a first improvement in prices. If so, we are probably in a long term cyclical bull market, particularly in the commodities space. I see this as a shift in the way forward where growth driven by government spending pushes a segment of the economy, which revives the economy.
Q. Today we see healthcare, logistics and supply chain as excellent investment options. If we are in the early stages of a new cycle of earnings and growth, how should investors read currently struggling sectors like autos? Is this an opportunity to buy old economy stocks and which sector themes would you prefer and which would you avoid?
A. Historically, I have seen that the market is a good mix of growth and value. In the initial phase, the markets are always looking for growth. We are at the stage where value companies would have preference over growth companies. Old economy companies, such as automobiles or commodities, have an important additional advantage, because when demand returns from consumers, with low interest rates, these sectors will also participate.
From the point of view of savers, it will be a difficult time not to generate enough return on bank deposits. Therefore, ultra conservative investors need to migrate to the mutual fund and fixed income space. Mutual funds have certain beauties – accrued interest and fluctuating market prices. Fluctuations in interest rates create ups and downs in yields. But, in a 5 to 10 year cycle, Fixed Income generally gives a good experience to the investor.
Q. If investors want to beat the cycle and create returns, do you see tactical asset allocation by the average investor gaining more momentum, especially given the high volatility seen these days. What are the dos and don’ts?
A. Tactical asset allocation is actually a disciplinary principle that honors an association between equity and debt. Whenever the past returns of an asset class are significantly higher than your expectations, there is a need to reallocate those assets to, for example, move to fixed income and equities and also include a certain amount. gold as an asset class in this space.
In fact, I would recommend that most investors start with a 50-50 type model towards equity and debt. And, depending on the expected return that can be obtained, organize your asset classes and increase your weighting according to the expected return. Keep rebalancing it because what you decide today may not be the same after three months after you’ve achieved your goals. Constant rebalancing through marginal tinkering between equity and debt is necessary, and gold can remain constant. If individuals cannot make this day-to-day portfolio allocation, you can check out the funds that some of us offer.
Q. If you had to ask a question of money, what would it be?
A. Money must have an element of security, it must take care of your future needs and at the same time, you must also have some kind of expectation on various assets which will allow an investment to do better and diversify the portfolio. . It’s all about creating wealth. It’s about creating a holistic wealth-building experience as well as an income that helps you save for emergencies.
Today, mutual funds have become an effective tool to overcome cycles of volatility in the capital markets. The discussion offered valuable insight into the right investment strategies and an understanding of which products are best suited to your risk profile against the backdrop of India’s economic growth prospects. In conclusion, the golden rule is to have a well diversified portfolio, with regular reallocations.