Investing decisions should be based on an interplay of factors such as goals, needs, risk appetite and aspirations. Therefore, there cannot be one common allocation for all investors, says Rahul Baijal, senior fund manager, equities, HDFC AMC in an interview with MintGenie.
He also speaks about the performance of funds across market capitalization spectrum, and the reasons for mid and small cap funds being more volatile in comparison to their larger counterparts.
June witnessed a net inflow of over ₹2,000 crore in small cap funds on account of stellar rally in the mid and small segments.
He explains why Nifty P/E multiples look more reasonable now. He is upbeat about some of the banking stocks, and the stocks that are likely to gain from the capex upcycle in India.
Edited Excerpts:
Recently, large cap funds saw a huge outflow of funds in the month of June. Since you manage Top 100 Fund, we would like to ask you about your views on the future outlook of large caps in general?
Historically, the large cap index in India has delivered returns, broadly in line with the nominal GDP growth of the country (5 year and 10 year rolling return in Nifty 100 has been ~12% as of 30th June 23, 5-year and 10-year nominal GDP growth has been ~10% & ~11% as of FY23).
As India continues to grow over the long term and given the growth projections for India by some of the agencies, Indian equities, including large caps, have brighter prospects.
Large caps as a segment continue to offer opportunity to investors looking for medium to long term investments as most of the companies in large cap space predominantly have proven business models, run by good management teams, and also provide stability to the portfolio during market downturns.
With the current outperformance of mid and small caps over large caps, the segment is now relatively attractive in terms of valuations. On an absolute basis also, the premium to its own history has also come down (NIFTY 100 is trading at 19x on 1 year forward PE basis which is a 12% premium to the 10-year average of 17x).
On an average, how much allocation - according to you - should small investors make to large cap funds?
At the broader level, exposure to large cap funds is normally a part of one’s portfolio. Historically, we have seen that investors often get swayed by recent market movements and tend to get overly exposed to the trending market cap segment/sector. Mid and small cap segments are generally considered to be attractive from a returns perspective but they are also more volatile as compared to their large cap counterparts.
Given that these market cap curve indices outperform each other at different points of time, investors generally diversify their investments across market cap segments and over the long term - asset allocation to equities is normally considered more important than market cap curve allocation. While there is no fixed range in mind, it varies on risk-appetite and goals of different investors.
In June, small cap mutual funds saw the highest ever inflow. What is your take on this phenomenon?
Equity mutual funds saw a net inflow of over ₹8k cr in the month of June 23. While the June 23 net inflow was a 3-month high, if one breaks down the net inflow’s category-wise, an interesting trend emerges. Out of ₹8k cr, small cap category saw net inflow of over ₹5k cr while the large cap category saw a net outflow of over ₹2kcr.
The current shift from large caps can be attributed to the stellar rally seen in the mid and small segments in the recent past. Just to put things in numbers, in the current financial year, mid and small caps have outperformed the large cap segment by ~10%.
While the current shift may be due to the recent mid and small cap outperformance, credit also needs to be given to India's resilient growth and the measures taken by the Govt over the last few years, which has instilled investors’ confidence in India’s long-term growth story.
What advice would you give to retail investors about maintaining a healthy ratio between equity and fixed income instruments in order to maintain a truly diversified portfolio?
‘No size fits all’ is a well-known saying; the same applies to the investing and personal finance world. Each individual is different and has different goals, needs and aspirations. Hence, there cannot be one common allocation for all investors.
Retail investors should take help of a financial advisor and formulate an asset allocation plan based on their individual circumstances, liquidity needs, goals and risk appetite. After formulating their asset allocation plan, investors normally allocate between various asset classes viz. equity, debt and gold.
For short term needs, investors normally consider debt funds that are positioned at the shorter end of the yield curve; this could help mitigate interest rate risks. For long term goals, investors normally consider equity mutual funds that could help them create wealth.
What is your projection of Indian markets in FY 2023-24? What direction do you think they will take?
The markets have been range bound for most of the last 2 years and formed a new high recently. In my view, a lot of excesses in valuations have got cleared in markets, both globally and locally over the last two years. Nifty PE multiples have moderated from a peak of ~24x in Sep 21 to ~19x now and look more reasonable - given the structural growth story that India offers to global and local investors.
We have entered a world, where 5-6% plus structural GDP growth stories are not too many, and India is clearly one of them with a very good depth and width in terms of companies to choose from.
Thus, I am constructive on the markets from a medium-term perspective; short term – the material risk for equity markets is a hard landing in the US economy – for which probability has reduced a lot, of late, in my view.
Which sectors are likely to perform well this year and what are the likely laggards? How is HDFC Top 100 Fund positioned?
At the broader level, we are positive on sectors with prospects of earnings growth and where the valuations are reasonable.
Currently, we believe some of the banks are well placed given their strong balance sheets, pick up in credit growth, good asset quality and reasonable valuations. We are also positive on companies that are likely to gain from the capex upcycle in India.
In healthcare, we like the hospital space and some companies with exposure to domestic formulations and specialty formulations in the US. We avoid stocks that are expensive and where the valuations do not justify the earnings growth. We follow a blended strategy of GARP (growth at a reasonable price) and value.
