In the wake of the Russia-Ukraine crisis, global stock markets are under heavy selling pressure. However, the recent selloff is seen as an opportunity by positional investors and various mutual fund companies as the stock market offers an opportunity to enter at reduced levels. ICICI Prudential fund managers believe that stock markets and equity mutual funds should provide exceptional long-term performance. They believe that the current war between Russia and Ukraine has provided an opportunity for long-term mutual fund investors, as markets will rebound strongly after the ceasefire in the war between Russia and Ukraine .
In an interaction with Livemint, Chintan Haria, Head of Product and Strategy, ICICI Prudential Mutual Fund further explained why he thinks long-term equity exposure is better than medium- or short-term.
Edited excerpts:
FII’s position in the Nifty 500 has fallen below 2012 levels. Is it good to invest in equity mutual funds?
Given the recent geopolitical uncertainty and possible rate hike actions by the US Fed and other global central banks in the future, we remain cautious in the short to medium term. However, from a long-term perspective, we are very positive thanks to the various reform initiatives such as RERA, GST, Insolvency and Bankruptcy Code, China + 1 strategy, reduction of the rate of corporate taxation, etc. led by the government, coupled with a strong pipeline. infrastructure initiatives planned for the next few years. Also, unlike the US, India’s corporate earnings to GDP ratio remains low and hence, in terms of the cycle, India is far from peaking both in terms of corporate earnings than valuations. Due to these factors, we believe India’s economic cycle should improve further.
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Although the valuation of the stock has corrected from record highs, it is not as cheap as it was in March 2020. Therefore, we believe the optimal approach is to ladder its investment through SIPS or to invest a lump sum in balanced perk and multi-asset strategies.
In the wake of the Russian-Ukrainian war, is it appropriate to increase exposure to large-cap stocks?
In each of the past six months, REITs have been net sellers of Indian stocks and have so far sold $15.41 billion. This is the longest REIT selling streak since 2008. It is a known fact that REITs invest heavily in large cap/blue chip stocks. So after this sell off, large caps seem to be better positioned than mid and small caps.
What is your suggestion to a new mutual fund investor in this geopolitically plagued stock market?
In our view, equity markets could do well over the long term, but we remain cautious about the short to medium term outlook. Rather than focusing on a single asset class like stocks; investors should consider a combination of other assets including debt, gold, real estate, etc.
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So, investors can consider investing in categories of schemes like dynamic asset allocation, multi-asset to name a few. The advantage of investing in such a category is that investors gain exposure to multiple asset classes within a single fund. For equity investments only, investors can initiate SIP in categories such as value, flexicap to name a few.
Gold has become a safe haven for investors in the current crisis in Ukraine. Does it make sense to increase exposure to paper gold and electronic gold at the expense of debt mutual funds?
Gold and debt are two different asset classes, each with their own distinct role in a portfolio. While gold acts as a hedge against inflation and the volatility of financial assets, debt gives the portfolio much-needed stability. So don’t invest in one asset class while ignoring the other. Investors who are considering increasing their allocation to gold in their portfolio may consider investing in Gold ETFs or Gold Fund of Funds. The general principle is that you can allocate around 10 to 15% of a portfolio to gold. The optimal allocation in his portfolio can be decided after consultation with a financial adviser.
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We believe gold ETFs offer distinct advantages. For starters, an investor does not need to worry about storage and theft as it is held in demat form, the cost of acquisition is low given the absence of manufacturing costs and other related expenses. There is absolute flexibility when it comes to buying and selling, as gold ETFs are listed on exchanges. One can make a transaction at the time of trading hours. Also, there is no need to wait to accumulate a substantial sum of money to initiate an investment, as investors can start an SIP with as little as Rs. 1,000 each month. This will allow investors to collect gold units over a period of time and leverage their portfolio allocation.
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