From geopolitical unrest to rising inflation to faster rate hikes by central banks, several global factors have weighed on equity market sentiment over the past year. The Indian economy is fundamentally well positioned and is likely to grow on a strong footing in the long term. However, in the short term, it can be affected by global events. Given this mixed backdrop, investing in current market conditions can be challenging for retail investors.
There are some basic principles to keep in mind when investing in such volatile times. First, start with asset allocation and stick to your plan. If you are overweight equities, reduce allocation and if you are underweight equities, remember to build exposure incrementally through SIP.
If you’re not sure how to go about asset allocation, choose plans that can do it for you. If you want to build exposure to equity and debt, opt for a dynamically managed asset allocation scheme. If you are looking to park your money in equity, debt and gold, you can consider a multi-asset class plan. The fund manager will then manage the allocation in such a way that the investor can take advantage of the opportunities in these asset classes.
If you are an investor looking to allocate to an equity fund, it would be better to go for a value-oriented scheme. The price was out of favor until September 2020, but once the market recovered from the pandemic-induced correction, it made a strong comeback. Often, in times of uncertainty, value plans make for better investments because they focus on investing in areas that make sense over the long term. Volatile times have opened the door to many price pockets in the region.
If you are a defensive investor, you may want to consider a dividend-yielding category. Dividend yield as a strategy works best during economic/market recovery phase as value is unlocked. At the same time, there is also an economic recovery underway that leads to earnings growth for reasonably priced stocks. This leads to revaluing such stocks, creating a win-win scenario for dividend-yielding names.
Another way to play a defensive theme is to invest in consumption-based funds. Consumption as a theme is secular in nature and an investor can consider investing in this theme at any point of the market cycle. This theme covers various sectors like automobiles, pharma, FMCG, consumer durables, retail and telecom. With its growing population, consumption demand in India is likely to grow at a steady pace.
From a strategic allocation point of view, the issue of exports is interesting given the devaluation of the currency. Indian IT, pharma and automobiles are major exporters to the US and will stand to benefit from the strong tailwind provided by the currency in the current scenario.
Finally, if you are looking for lump sum investment opportunities, you can invest in asset allocation schemes. Another approach is to use features like Booster Sip and Booster STP to stagger your investments and capitalize on market volatility. This feature allows an investor to mobilize money based on changing market conditions.
So, if the market valuation increases, the amount deployed will be minimum and when the market valuation is attractive, the amount of funds deployed will be more. Consequently, the investor gets the benefit of both cost and price averaging through this facility. Another option is to invest in asset allocation schemes through which one can gain access to multiple asset classes within a single fund.
As the Reserve Bank of India is on track to normalize rates, investing in floating rate bond funds will be optimal in the short term. This is due to its inherent nature to accommodate rising interest rates and the coupons that accrue to investors when benchmark rates are high. Since floating-rate securities have a positive correlation with rising interest rates, they provide a much-needed cushion to the portfolio.
Dynamic bond funds can be a good option for investors with a long-term allocation to debt or who are unsure of where to invest within the debt market. A dynamic bond fund seeks to benefit from interest rate volatility by managing duration. Here, the fund manager can manage a tenure between one and 10 years, and depending on the interest rate scenario, the scheme can also invest in corporate bonds and G-Secs.
In conclusion, the road ahead looks uncertain but that doesn’t mean investors shouldn’t sit on the sidelines. Based on your risk appetite and asset allocation needs, opt for schemes that help you maximize every market condition.
(The author is ED and CIO, ICICI Prudential Mutual Fund)