“So, rather than living with the illusion of timing the investments, it is better to have a disciplined approach with well planned asset allocations to reach desired financial goals. Investment through SIPs should continue. For any lump sum investment, a staggered approach over 6 months could be considered,” Swati Kulkarni, EVP & Fund Manager – Equity of UTI Mutual Fund, said in an interview to ETMarkets.com.
Edited excerpts:
Notwithstanding minor corrections, the bull run in equity markets seems to have surpassed all expectations. Do you think the current valuations are stretched? How much of an upside are you expecting in benchmark indices?
Current valuations, P/E as well as P/B are beyond 1 standard deviation above the last 10-year average for various indices across market capitalisation. For the near term, the current consensus earnings growth estimates seem to be well priced in. The long-term chart of Nifty 50 index movement shows that all the previous peaks have surpassed, despite intermittent corrections, reflecting the fact that the market follows long-term earnings growth of its constituents. As long-term investors, we see many positive factors that will fuel this earnings growth but in the short term, since the valuations are not supportive, the market may correct, should there be risk elevation.
However, equity investing is for the long haul. The low interest rate and thus low cost of capital boosts equity valuation. Businesses are valued in perpetuity by discounting the expected future cash flows. Our focus has been to invest for the long term in businesses that generate consistent cash flows and have well managed capital structure with returns better than the cost of capital. We are not equipped to guess the benchmark indices movement.
How does an investor navigate the prevailing volatility in the market? How does one ‘time’ investments in such a market?
Investors could rebalance their asset allocation to the desired level to align with their respective risk tolerance. For example, if 60% was the desired equity allocation and with higher gains over last year, actual equity allocation has moved to 70%, that may be reduced back to 60%. For those who invest in direct equity, it is important to evaluate whether the profits for the company were out of a short term opportunity or could sustain in the long term; is the capital structure too stretched with high leverage? Is cash conversion poor or if there is any risk of disruption/ technology obsolescence.
Investing at ‘the bottom’ of the market is theoretical or by chance. We often tend to ignore the risk of inadequately investing in equity assets and missing on the up move. So, rather than living in the illusion of timing the investments, having a disciplined approach with well-planned asset allocation to reach desired financial goals is important at all points of time. To my mind, investment through SIPs should continue. For any lump sum investment, a staggered approach over 6 months could be considered.
In its October 2021 Bulletin, the RBI noted a rapid jump in net inflows from small towns and cities in mutual funds, particularly cities beyond the top 110 ones. Are we seeing a broad-based shift in investment patterns?
The MF awareness has improved considerably over the past few years thanks to the efforts of MFs and AMFI. Buoyant equity markets also helped in attracting new investors. With a well spread branch network and trusted brand, UTIMF has inflows from all over the country.
What is the best pick at the current moment between smallcaps, midcaps and largecap stocks?
As discussed earlier, valuations are above the historic range across market capitalization. SIP for regular and STP for lumpsum investment could be the approach. Largecap could be a better option over mid or smallcaps from the perspective of the near-term volatility. Having said that, one should build a well-planned allocation, suiting the individual risk profile and return potential across the market capitalization.
How has UTI Mastershare Fund performed so far in 2021? Between UTI Mastershare unit scheme, the MNC Fund and the Dividend Yield Fund — what would you recommend?
Year to Date, UTI Mastershare has outperformed the benchmark S&P BSE 100 by 1.6% and is ranked among the top 40% amongst the peers. As regards the recommendation, let me state upfront that I have SIPs running in all three for the past many years. One could understand the equity allocation with core and satellite approach, core allocation being higher and held longer than the satellite allocation. UTI Mastershare, being a Large Cap Fund investing in leading companies with durable competitive advantages, could be considered as a core holding.
UTI Dividend Yield Fund and UTI MNC fund have different investment mandates and thus have little overlap in the portfolios. Both funds could be considered satellite portion with allocation of 15-20%.
Has the market discounted the growth recovery expectation in the earnings and the economy? Does this pose a risk for investors with short-term horizons?
Earnings in the base year were depressed due to lack of normalcy in operation. The consumer spending behaviour, pick up in infrastructure spend, in private capex and in global economy at the macro level and company specific factors at the micro level like operating leverage, interest cost and other cost controls, provision write back etc. could support earnings growth over the medium term, although the current expectations seem to have been largely priced in. High valuations render little support to the markets if there is any elevation in the risk — be it in the form of earnings disappointment, hard liquidity unwinding, sustained commodity inflation etc. Investors should always have a long term investment horizon to make the most from the equity asset class.
Is the market prepared for normalisation of monetary policy and higher interest rates both domestically and globally?
Institutional market participants would know that with normalcy returning, the ample liquidity support provided to deal with the pandemic will start to unwind. Hence it is not an unknown variable. The central banks have been communicating their thought process to the market through the minutes of the policy meetings. However, if the pace of it surprises the market or the inflationary pressure is expected to stay elevated for longer, there will be a movement of flows out of EM which will make markets very volatile.
Which are the sectors that are likely to do well in the near to medium term and what are the biggest risk factors that investors should watch out for?
I believe IT, automobile, banking, telecom and pharmaceuticals are likely to do relatively better.
The sustained commodity price rises leading to raw material cost inflation adversely affecting profitability, sticky inflation leading to hardening interest rates, harsh unwinding of liquidity amidst the patchy growth recovery, Covid resurgence are a few variables that could trigger risk off trade.
