Saurabh Rungta’s pre-election strategy: Book profits in mid and smallcaps, allocate funds to largecaps

12-15 percent returns driven by earnings expansion are possible if there is no major black swan event.

Will small-caps outperform the Nifty?

Over three years, small-caps should deliver better returns than the Nifty.

What is the common mistake investors make while investing in small-cap stocks?

Investors lack patience and/or conviction, especially when they see their small-cap stocks underperforming the index or peer stocks. They tend to exit, thus not creating the wealth that they could have if they held the stocks for the long term. We always say that you buy 10 percent expensive and you sell 10 percent cheap. Don't try to time the market.

What do you expect in the run-up to the elections? What is your pre-election strategy?

The market has broadly discounted an outcome; the question is over the margin of victory. While from a short-term lens, we can witness decent volatility in the market, in the long term, the trend is upward. Given the current market positions, for tactical allocations, we are advising clients to book profits, especially in mid/small-caps with a clear intent to either allocate to large caps or retain cash with an intent to re-enter markets at appropriate levels.

Where are HNIs and Ultra-HNIs investing?

We see increased participation in unlisted companies and pre-IPO deals. In fixed income categories, investors are showing a great amount of preference for Performing Credit and Structured Credit. The opportunity size is huge in distressed credit. There is a visible trend of preference for assets such as REITs and InvITs, where yields can go up to the 12-15 percent range.

Are your HNI clients enquiring about SME stocks?

A big chunk of high-networth individuals (HNI) and ultra-HNIs are still not getting into the SME space. We are seeing some of our clients delving into SMEs to test out the fad, but they are not investing any meaningful percentage of their wealth. Most of these people have worked with an IPO or SME banker in the past and a majority of them had a very mediocre to pretty bad experience. To summarise: the risk is not getting adequately compensated by the reward. Hardly any of them ended up picking a good company that got onboarded onto the main board. They have not figured out the science based on which they can start allocating a bigger percentage.

What are the risks involved in investing in SME stocks?

Corporate governance issues and the small size of the company are the biggest concerns when investing in SME companies.

What is your view on smart beta strategies?

Increasingly more and more smart beta strategies are being offered to HNI clients. Smart beta strategies have outperformed in FY24. However, it is difficult to conclude that all strategies will keep outperforming the Nifty. Averaging is expected to take place for some of the strategies, going ahead. We believe that growth and momentum-based smart indices will have a higher probability of outperforming in this decade.

What is your view on the increasing volume of derivatives in India?

Average trading volumes are increasing. However, if we consider the average premium paid in the case of options, it is not increasing in the same proportion. This may be happening because of the weekly expiry, which is now available on almost all weekdays. Also, now, the volatility index VIX remains in the 10-12 range while a few years back the range was around 18-20, which shows that higher volumes are bringing down volatility.

Is there any change in the average ticket size of your clients?

Our average family size was around Rs 10 crore in 2010 and now it is Rs 50-60 crore.

Are FIIs still buying large caps?

FIIs are taking good positions in large-sized mid-cap stocks, too. In quite a few bulk/block deals of mid/small-cap companies, we can now see participation of foreign institutional investment.

Are you getting requests from clients to invest in global equities?

Yes, there is demand from HNIs and Ultra HNIs, but the biggest deterrent is the capital account convertibility, both in terms of the amount and the process for taking money outside.

What are your top investment bets and what are the investment cases for them?

The top investment bet as an asset class will continue to remain equities, provided the investment horizon is 3-5 years. While markets may have run ahead of fundamentals and some market capitulation can happen anytime, we continue to remain bullish on the medium to long-term horizon. Tactically, we believe long-duration investments in fixed income as an asset class, too, make a lot of sense.

What do you perceive as top risks?

Some factors include oil, geopolitical developments, ensuing high rates, and the outcomes of the upcoming elections both in India and the US.