Asset allocation
All investment experts highlighted the importance of taking an asset allocation approach to investing, depending on an investor’s risk-appetite and goals.
Sankaran Naren, executive director and chief investment officer of ICICI Prudential Mutual Fund, said, he was worried that while people often talk about asset allocation, but in practice get caught up with “anti-asset allocation”. He spoke about it in the context of investor money chasing gold and silver ETFs (exchange traded funds) after the rally in gold and silver prices.
“Over the last two years, since markets became costly, we have been recommending anything to do with asset allocation,” Naren said. “Hybrid funds, equity savings, balanced advantage, multi-asset, aggressive hybrid—these are the categories we have been recommending.”
“For people who think gold and silver have become too euphoric, we are now saying maybe avoid multi-asset,” he added.
Rajeev Thakkar, chief investment officer & director, PPFAS Mutual Fund, said, “Whether markets have done a sideways movement, moved down or whether they are up, typically it won’t affect any investor’s risk appetite or long-term goals. If someone is 25-year-old or young, joining the workforce and has a long period of investing for himself or herself, has risk covers in place, has a stable income source, bulk of the money can go in growth assets classes such as equities. Someone who is retiree, dependent on cash flows should have a fixed income-heavy portfolio. So, that doesn’t change whether we are having the conversation today or three years out or six years out.” For those new to the market or those who can’t take volatility, Thakkar advised it is best is to enter through hybrids and “gradually move up the curve”.
“Start with a conservative hybrid fund or 50:50 kind of balanced allocation to equity and debt; and gradually increase the risk portion if someone is not attuned to volatility because we do live in volatile times today,” Thakkar added.
“Hybrids do make sense for new investors. From equity savings to aggressive hybrid, new investors can move across the spectrum as per their risk-appetite,” said Neelesh Surana, CIO of Mirae Asset Investment Managers (India).
On equities
Money experts were of the view that investors should moderate their expectations on equities. “Whenever people talk about equity returns, for some reason 15% is still deeply ingrained in their minds. That expectation comes from an era when inflation was close to double digits, PPF rates were around 12%, and government bonds yielded nearly 14% in the mid-1990s,” said Thakkar. “You can’t expect those kind of nominal returns in future when we know what the inflation numbers are and what the interest rates are. Hypothetically, if equity returns at index level are high single digit or low double-digit, it will still beat bonds, but for some reason end-customer or even people who do financial planning are not baking that number in.”
“Right now, we are in moderate return phase. But some point in time, when markets see a change, that point in time you can have a higher return phase also. If you look at 2017-2018, we also had this belief of a moderate return phase. Once Covid hit and markets changed; our view changed. And we actually believed in a higher return phase,” explained Naren of ICICI Prudential.
“So, today we may have a moderate return phase. But if the markets correct meaningfully. We can change the view from a moderate return to a higher return phase. So, if you are asking me starting today. Do we believe in higher return phase, the answer is no, but if the markets correct meaningfully, we can change that view from a moderate return to a higher return phase. So, today if you are asking me do we believe in a higher return phase, the answer is no, but at some point in time in future can we again have a phase where we go back to say higher return phase, the answer is yes, its possible,”
Thakkar agreed that starting valuations matter. “If starting valuations are cheap, along with earnings growth, you can have valuation re-ratings, and that can add to the growth,” he said.
“Valuations are reasonably attractive, but they are not dirt cheap. So, all put together we will get reasonable returns, but I will still put it in a band of 12-14% over five-to-ten-year period, which still quite solid,” said Surana of Mirae Asset.
“Whatever you don’t need for next three to five years should be set aside in an asset class that compounds beautifully; which has done so in the past and should do in the future and which is equity funds. And within that, there are various cohorts. Getting large and midcap funds or multicap funds make a lot of sense in terms of getting representation across sectors, businesses,” said Surana. “So, any investable surplus you don’t need to for next three to five years, large share of that should go to equities. But obviously, it is individual-driven. We can’t have the same answer for everyone. It depends on the investor’s starting point, asset allocation target, discipline and consistency in maintaining that asset allocation.”
Gold, silver ETFs
In recent times, investor money appears to be chasing gold and silver exchange-traded funds (ETFs) for returns, rather than for asset allocation.
According to Naren, this trend showed that several investors are still caught up with “anti-asset allocation”.
He had a special mention for the risks from silver as an asset class as of now. “Silver is very speculative. Our analysis in January suggested that silver any day can go up by 10%, any day could fall by 10%. It is like a small-cap stock, without price-to-earnings, price-to-book, dividend yield and without cash flow.”
Gold is a less speculative asset class, he said, while still sounding caution. “It is like a mega-cap stock, which is widely-owned, as central banks hold huge gold reserves. Consequently, it is unlikely to go up 10% one day and fall 10% next day. And if people lose faith in the dollar, they would still go to gold. Still, investors also need to be careful in gold after such a sharp rally.”