The market is on a roll as it shifts sideways instead of going high up or falling steep down continuously. However, this rally has not dampened investors’ spirit as they continue to pour money into various equity and hybrid mutual funds. This was long due considering the ceaseless rally we enjoyed in 2021. Rajiv Shastri, Director and CEO, NJ Asset Management Company shares withMintGeniethe impact of market volatility on investors’ mindset and decisions.
Q. Following market cues, people are gradually withdrawing their investments from the market. Do you think this will affect the working mutual fund houses looking forward to buying and holding good stocks at low prices?
There is very little evidence of large-scale withdrawals from equity mutual funds. In fact, in the last two months alone close to Rs. 50,000 crores of net inflows have come into equity and hybrid funds. As such, we don't expect any change in the manner in which equity and hybrid funds operate or are expected to operate in the coming days.
Q. Seeing the current market condition, which asset classes would you advise your investors to shift to?
We believe that the Indian economy continues to be in a high nominal growth phase and expect the equity markets to reflect this over the medium to long term. However, since equity markets don't move in a linear manner, there will be volatile periods. We believe that Indian investors have reached the level of maturity to understand this and it is their flows that are providing a floor to the market. As such, equities continue to be attractive from a mid to long-term perspective. Other asset classes may not live up to their earlier hype.
Q. Gold prices are set to increase and may in the future if countries fail to tackle inflation. Apart from equity, should one start investing in gold mutual funds or ETFs to reap value in the long run?
While gold prices may increase in the coming days, the relationship between the international gold price and inflation has become increasingly strained over the last few years. Also, as the ability of FPIs to influence Indian equity markets has all but disappeared, a compelling reason to hold gold as an investment has also weakened considerably. Earlier, the Indian price of gold acted as a counterweight to equity volatility since the FPI flows out of equity caused equity markets to fall and USD/INR to rise as the FPIs bought USD to take away. This caused the gold price in India to rise along with the USD/INR, negating a part of the equity volatility. Since over longer periods, both USD/INR and Indian equities have risen, the trend remained positive even though volatility was reduced by holding a mix of equity and gold. With FPI movements not having a meaningful impact on the equity markets and the USD/INR anymore, this inverse volatility relationship has broken down. And while the long-term trends in both USD/INR and equity remain positive, holding a mix is not as compelling as earlier.
Q. Investors are contemplating a jump in capital gains taxes since the Ministry announced them up for review. Would it make sense to continue investing in equities then?
Investors invest to make gains and should remain focused on that. Taxation is a second-order consequence of investing and is conditional on gains being made. With the uncertainty inherent in generating gains from any asset class remaining intact, one cannot estimate the amount of tax one will have to pay at the time of investment. So, investments will need to continue being made based on the relative merit of each asset class and their relative ability to generate gains. Equities will continue to make sense till such time their ability to generate returns is superior to that of other asset classes. No change in the tax regime should influence that.