Allocate to small, midcaps over time: Prashant Jain

“Interest rates in India are at a reasonable level. I am not saying they cannot move up higher, but I think it will start making sense to slowly start building duration in the portfolios even with that safe portion of capital. Of course, you must consider a few years’ perspective because what happened in 10 years now takes place in 7.5- 8 years, ” says Prashant Jain, ED & CIO,

Coming to asset allocation, should one be more tilted towards equities?

I have said earlier on several occasions that asset allocation should be driven more by individual situations and risk appetite as well as your risk capital, meaningwhat you can spare for long periods of time, where you can tolerate volatility emotionally and financially that we should invest in equities.

The other part should be invested in fixed income. Interest rates, bond yields have moved up. If you have invested in duration funds sometime back, the returns in the recent past are indeed looking low but I am sure many people like me have been advising against buying duration in a low interest environment.

Now, interest rates in India are at a reasonable level. I am not saying they cannot move up higher, but it will start making sense to slowly start building duration in the portfolios even with that safe portion of capital. But one must consider a few years’ perspective because what used to happen in 10 years now takes 7.5 to 8 years. This is a reasonable level I would say.

Your tilt is towards energy, you own and bought PFC and in the past. These stocks were very cheap but given where the energy cycle is right now, is there a chance that energy consumption will come down and inflation will have an impact on some of these asset classes? Are you still bullish on energy as a category?

You are right my funds have been overweight in these spaces, and the outlook continues to be

reasonable for this space. Banks are well set on rising credit growth with the scope for margins to improve, very low NPAs. Provisioning cost should be quite low, and the digitisation or the move to digital banking will support larger banks. The outlook there is quite decent.

Financials have also underperformed sharply because they are mostly owned by foreigners and have borne the brunt of FII selling. Financials are looking quite reasonable. Of course, if the selling continues, they may underperform for some more time.

Coming to energy, everyone has observed what is happening in the energy space and the energy space offers sustainability. It offers growth because India’s energy demands will continue to rise and while the valuations have moved up meaningfully from the lows, they still offer reasonable value. There is merit in remaining invested in this space as prices move up and incremental merit keeps on reducing.

Last year your view was the largecap stocks as they offer better value than midcap stocks, but now midcap stocks have corrected. In fact, Nifty has not corrected and largecap stocks have not corrected. Is it time to look the other way now?

You are partly right but just to tweak that argument a little, it is better to say that leaders or businesses that have competitive advantages whether they are midcaps or largecaps depending on the industry offer better value or better risk adjusted returns.

You are right that in this fall, the small midcaps have fallen off much more than largecaps and this is one reason why I have said that most portfolios should have a tilt towards largecaps because they offer similar returns over a portfolio with small midcaps but with lower volatility. While small and midcaps have corrected, the first round of investments in my opinion should go towards large companies and largecap funds because that is where there is liquidity, that is where the risk is controlled. Maybe when markets stabilise and some liquidity comes in the small midcap space, we can start looking at that space.

The amount of stock that has changed hands in largecaps is far more than in the small midcaps space. I could be wrong, but I feel that the selling pressure for those who want to realign their portfolios in the small and midcap space remains, I would probably prefer largecaps. Over time, one could allocate more towards small or midcaps as well.

It looked like a complete bull market like never before. Now the perception has changed, and it is overwhelming to see that suddenly your SIPs are giving negative returns. How does one deal with this kind of a dilemma where you know that whatever you have invested in the last couple of months have not given you returns, and even fixed deposits are giving you better returns?

Markets like these always take excesses away and you can see how the narrative is changing towards crypto, many new age businesses and very high PE companies. You can see how those valuations are correcting, and those who had not experienced the cycles earlier, they would probably be on the wrong side of these markets. I think they should take this as a learning experience.

I always joke that it is good to start in equity markets with a little loss because it prevents you from making bigger mistakes on a bigger scale. These excesses are going away and these markets will be more rewarding for the investor who follows the simple principles of investing; invest in good quality businesses, focus on reasonable value, and remain diversified.

If people have not made money over a year period, I do not think there is anything to worry because equities are not a one-year asset class. With equities, the best returns come over much longer periods. And the other good thing is that your returns are never lost. If businesses keep on growing and markets do not grow, even then you will get to those returns at some point in the future and that is how Sensex has compounded at such healthy levels over long periods of time.

So, I would say that those who have risk appetite, should start increasing exposure towards equities but of course, they should avoid futures and options by and large unless they are really experienced and know what they are doing. They should remain diversified and focus on quality and value or alternately focus on mutual funds.

Your schemes schemes and some of the funds which you manage are almost in the top quartile.

It feels quite good. We are relaxed now but for some time funds had not done well. We had positioning in the corporate banks and we were caught on the wrong foot when Covid struck because these sectors were impacted the most but we are focussed on quality and sustainability in the same businesses that were in pain during the lockdown. They have come out quite strongly and the market has finally seen value in that space and that is what has enabled this comeback across our funds.

Harry Byrne

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