We all know that it is impossible to time the market consistently. So what's a good investment strategy to follow? According to Rajeev Thakkar, Chief Investment Officer & Director, PPFAS Asset Management Private Limited, one must let the investment returns compound and should redeem and switch assets only if there are strong reasons to do so.
In an interview with Mintgenie, Thakkar shared his views on debt funds, possibility of further correction in IT sector, recession fears and more.
Q. The market seems to be pricing in the possibility of a slowdown due to the recession. Do you think this investing attitude will help the Indian stock market recover faster than the global markets?
Answer: When we talk about the recovery of the Indian market, maybe we are referring to the market giving good returns. As such the Indian indices are trading near all-time highs and there has not been much of a fall. It is the global indices which have fallen about 20 percent. India as such is well placed economically and this is reflected in the stock prices. Looking at valuations, however, the Indian market looks somewhat expensive as compared to global markets.
Q. Many personal finance analysts are recommending investors put money in debt funds. What is your take on this?
Answer: There can be two approaches to asset allocation. One approach is to take a tactical approach. This approach is all about trying to time the entry and exit into various asset classes. This involves constantly thinking about whether it is a better time to invest in liquid or debt or equity.
My advice to investors is to take the second approach. This approach is based on the investor's financial goals, risk-taking ability and risk tolerance. The reason for taking this approach is given below.
- It is difficult if not impossible to time the markets continuously. Even central banks till recently were saying inflation is transitory and rate hikes will not be required. They did a U-turn and are now hiking rates aggressively. Who is to say that the so-called market experts have got it right in their predictions on interest rates in the coming months and years?
- Each round of shuffling between individual securities or between asset classes brings with it taxes. It is best to let the investment returns compound and one should redeem and switch assets only if there are strong reasons to do so.
One should always stick to a properly thought-out allocation plan which may have been prepared in consultation with a financial planner.
Q. The market is moving sideways with most of the ‘bear run’ being attributed to the IT sector and auto stocks. Do you foresee further corrections, and how long do you think would it take for the market to reach new highs?
Answer: It is difficult to predict market movements and I will not hazard a guess on this. We are not too far from all-time highs even at current levels. I will however not call the current environment a “Bear Run”. A bear run looks very different from the current environment…
Q. Asset management companies are rushing in with new fund offers (NFOs). Investments through SIPs in funds have increased. Do you think that retail investors are slowly realizing the potential of equities in creating wealth?
Answer: It is heartening to see the increased participation of investors in mutual funds. As India is moving away from high-return government-guaranteed products to market-linked products, people are realising the potential of equities in generating wealth.
At the same time, there are a few concerns. Investors many times are coming with unrealistic return expectations. Typically, one should expect corporate profits to grow in line with the nominal GDP growth. The stock returns would be similar to the corporate profit growth over long periods. If we assume a real GDP growth rate of seven to eight percent per year and an inflation rate of say five percent, equity returns (which are not guaranteed) could be around 12-13 percent. If people invest with very high return expectations, they are likely to be disappointed.
The other concern is that most equity investors have not seen prolonged bear markets in India in recent times. In recent times, buying aggressively in any market fall has worked out well in recent years. What investors should remember is that many times, equity markets can remain flat or in the negative category for many years and one should have a sufficiently long investment horizon to really benefit from equity’s wealth-creating potential. This horizon should be a minimum of five years and more than a decade would be preferable.
Q. Global economies are eyeing India with great interest and optimism. Foreign investments are flowing in continuously. According to you, which sector would benefit the most?
Answer: I will recommend that investors stick to diversified equity funds rather than try to pick sectoral winners and buy into those sectors. Sectoral flows tend to be fickle and change very quickly.
Q. Investors keep tinkering with their equity investments owing to their unrealistic expectations of returns from them. What would be your advice to investors for the coming year? What is your advice to new investors in the market?
Answer: The finance ministry is very happy with the tinkering by investors on account of the capital gains tax that they get. My recommendation is to stick with investments for the long term and let them compound tax-free for you.
Charlie Munger, the partner of Warren Buffett , says, “The secret to happiness in life is to have low expectations”. To illustrate, say your expectations are for a 10 percent return and you end up with 12 percent returns, you will be happy. On the other hand, if you expect 25 percent returns and actually get 20 percent, you would still be unhappy.
Indian indices have historically delivered around 15 percent returns annually…The past 15 percent returns were in an era of high inflation and the future nominal returns could be significantly lower on account of somewhat lower inflation rates. Investors should temper their expectations accordingly.