Trying to time the markets and move in and out is futile. According to Salonee Sanghvi, Founder, My Wealth Guide, equity is volatile in the short term but if you have a long-term goal, then the volatility substantially reduces in that time horizon.
In an interview with MintGenie, Sanghvi said that one must look at marrying time to goal and risk-taking ability to arrive at an overall asset allocation.
Q. There is a fear of imminent recession. Contrary to expectations, more people have been opening Demat accounts and investing in mutual funds through SIPs. Does it reflect growing maturity among investors in the stock market?
I feel Covid-19 taught us a great lesson on how difficult it is to predict markets. No one expected to see the kind of bull run we did in 2020-21 and all those who exited actually lost out. Trying to time the markets and move in and out is futile. Domestic investors have understood this well and I believe are more focused on the longer-term picture. We are amongst the fastest growing economies globally and talking of a $1 trillion economy in the next few years. The kind of wealth that it will generate will be unprecedented. It is one of the biggest reasons India hasn’t corrected as much as global markets and the monthly SIP book has gone from ₹7,300 crores in 2020 to ₹11, 300 crores.
Q. Asset management companies in India are coming out with short-term to medium-term investments. Considering the recurring shocks of volatility, do you think parking money in these funds would compensate for the losses from equities in the coming months?
There are many new products and new fund offers (NFOs) being launched. While some amount of debt is required in a portfolio I would recommend designing a portfolio basis the risk-taking ability and time to goal/requirement of funds. Equity is volatile in the short term but if you have a long-term goal that is 7-10 years away then the volatility substantially reduces in that time horizon. If you have a money requirement in the next few years then shorter-duration debt funds are a good option to park money.
Q. What selection criteria do you adopt to arrive at the right choice of an investment portfolio?
90 per cent of your returns are determined by your asset allocation, five per cent by product selection and five per cent by market timing. One should look at marrying time to goal and risk-taking ability to arrive at an overall asset allocation. For any goal that’s less than three years, regardless of risk-taking ability, I would look at allocating entirely to debt. For goals from three to five years, one can look at 20-40 per cent debt depending on whether one is conservative or aggressive in investing. For any goal longer than five years one can look at 30 per cent equity if one is conservative up to 80 per cent equity for those who are aggressive.
|< 3 years
|> 7 years
|80% Debt 20% Equity
|70% Debt 30% Equity
|70% Debt 30% Equity
|50% Debt 50% Equity
|60% Debt 40% Equity
|20% Debt 80% Equity
Q. Once the market is relieved of the grip of recession, which sector or market cap stocks do you estimate to fire up first?
During a recession, money flows to safer sectors and assets. You will see large caps and defensives like Utilities, Pharma, FMCG, and IT performing better during this period. As the economy starts to recover, mid and small caps will start outperforming, especially cyclicals like Auto, Metals, Financials, Real Estate, Discretionary and Capital Goods.
Q. What is your approach to managing risk in your investments?
Asset allocation and diversification is the best way to manage risk. An important factor is to have an exit strategy. Deciding when you would sell the investment. Cutting your losses is the hardest to do psychologically but few people realise that a stock that has fallen by 70 per cent can still fall another 70 per cent from there. We design a portfolio in such a way that even if a stock fell by 50 per cent it would not impact the portfolio by more than two to three per cent.
Q. In sync with the new budget guidelines, do you advise people to rejig their investments? If yes, which asset allocation do you advise people of?
The major rejig basis of the Budget would only be for those investing in market-linked debentures (MLDs) or high-value insurance policies since the tax benefit is no longer there. For the rest, there should be no substantial change in the principles of deciding the asset allocation and investing basis.
Q. You advise your clients regarding their wealth management strategies. What is the most common mistake you see your clients making while investing money?
I think one of the most common mistake people make is using insurance for investment. When you try to mix the two, neither do you get a great return, nor a great way to manage risk with a high cover. It is better to segregate the two. Another mistake I see people make is trying to predict and consequently time the market. We did research on investing each time the market fell two per cent vs a regular SIP and the returns were in fact higher in the SIP.