Got Rs 10 lakh to invest now? Kotak AMC's Nilesh Shah suggests not to over-buy equities

Too much has been happening in the markets, of late. In this confusion, where should you put your money? Here is what Nilesh Shah, Managing Director, Kotak Mutual Fund has to say:

How should investors approach equity markets in this uncertain environment?   

There are too many uncertainties right now and there is no way to predict how these scenarios will play out. Crude oil prices could go higher or prices could come down. The US Fed rate hike could go beyond what is priced in by the market or could fall below what is priced in by the market. Russia-Ukraine situation can de-escalate or further escalate. So, in this kind of scenario, we have to be mentally prepared to face volatility. Being aware of volatility itself is half the work done. What we saw between March 2020-October 2021, when the market was giving one-way movement, that is unlikely to happen in the days to come and we need to accept that.

The second is how do you prepare for that? The best strategy is to maintain an asset allocation. This is not the market where you should be leveraged, this is not the market where you can be overweight on equity as an asset class.

This is the market where you maintain equal weight on equity as an asset class, with marginal overweight on Large Cap and marginal underweight on Mid Cap and Small Cap.

You can use correction as an opportunity to increase your allocation. Now, you won’t increase allocation at one go because there are lots of uncertainties, but whenever correction happens, you keep on increasing your overweight in a very gradual and calibrated manner.

Second, more from a bottom up point of view. This is not the market where you want to be in expensive stocks or stocks which are based on hope and price to vision kind of valuation. Money is going to be scarce, money is going to become costly. So, you try to focus upon reasonably valued stocks rather than expensive stocks.

At the same time, please also remember to keep faith on the long-term story. We did pass through a very torrid time after the outbreak of Covid-19, which was as uncertain as this. But we overcame it. So, be ready for short-term volatility, but don't lose focus on long-term growth opportunity.

Where are the options for investors looking at debt investments, which can give them reasonable inflation-adjusted returns?

If you're looking to invest in debt, there are multiple choices. For someone, who is comfortable taking slightly extra risk to generate slightly extra return. They can look at REIT/INVIT kind of structure. Some are listed, some will get issued during the year. REIT/INVIT are not fixed income, but they can give you better return with slightly higher volatility. The trick here is to create a diversified portfolio of REIT/INVIT rather than a concentrated portfolio.

The second thing to look at is short- to medium-end of the yield curve or duration. So, let's say one-year to five-year maturity funds, which are PSU bond funds, corporate debt funds, short-term bond funds. These are the funds where a lot of RBI action is priced in and as RBI keeps on raising policy rates, there will be lesser impact because bulk of the bad news is priced in.

There are also senior citizens and people who are today worried about lower returns in bank Fixed Deposits (FDs) and corporate FDs. Apart from REIT/INVIT, they can also look at hybrid funds.

We have a variety of hybrid funds. For example, debt-oriented hybrid schemes that invest between 10 percent to 25 percent in equity, there is equity savings schemes which goes from 10 percent to 50 percent in equity, there is balanced advantage fund which goes between 20 percent to 80 percent in equity and there is balanced fund which goes 65 percent to 80 percent in equity. Now, these funds are obviously not fixed income, but you can invest in them by preparing for higher volatility to get higher return.

You can use systematic withdrawal plans (SWPs) to get regular cash flows from these products.

How should investors look at international markets? The overseas investment limits for mutual funds have not yet been enhanced.

Clearly, there is an opportunity in global market in this correction. While there is no certainty about the short-term, over a period of time there will be opportunities by investing in offshore. Stocks listed in overseas markets have corrected quite reasonably, valuations have become reasonable. There is fear of recession, which is why markets are spooked. The same fear of recession will push central bankers to recalibrate their policy of raising rates and tightening liquidity. When that happens, automatically fears of recession will recede and markets will take off. As of today, the only limit available is in funds investing in overseas-listed ETFs. One should utilise it, while this limit is available.

What should be the gold allocation?

One should have some allocation to gold, between 5 percent and 10 percent of their portfolios.

Where do you invest your money?

About 70 percent of my investments are in equity and rest 30 percent is between real estate, gold, fixed income and offshore. I also save my money through NPS.