Equity investors are a worried lot due to increased volatility in the financial markets. At the same time, the high interest rates make a strong case for investing in fixed income. At this crucial juncture, Ashish Shanker, Managing Director (MD) and Chief Executive Officer (CEO) of Motilal Oswal Private Wealth shares his views on various asset classes and addresses some of the key issues pertaining to investments. Edited excerpts:
Does change in debt funds’ taxation impact investors? What is your advice to investors?
The indexation benefit on capital gains is not available for units of pure fixed income funds purchased after March 31, 2023. That may change the way some investors invest. Some of them may want to look at schemes with a minimum of 35 percent equity allocation, to avail indexation benefit on capital gains.
Despite this development, it is not the end for debt funds. You pay tax when the coupon is accrued or realised on bonds or fixed deposits, whereas in fixed income funds, you do not pay taxes till you redeem the units. Debt funds are a great vehicle to compound money in fixed income. Debt funds assure liquidity. Sophisticated investors can still play the interest rate cycle very well with debt funds. For example, if you feel interest rates are peaking, you can buy long duration funds to pocket some capital gains, in addition to the coupon. Looking at these advantages, debt funds are the easiest product to execute your investment view in fixed income.
What is your view on interest rates? Will RBI further raise rates?
Last year, the entire narrative was dominated by inflation globally. What the US Federal Reserve does is generally followed in most parts of the world. So, as Fed started hiking rates aggressively, India also followed suit. Although, I think, in India, inflation never became as big a challenge as in the US. In the last couple of months, we have seen bank failures in the US. The intervention by the Fed is effectively quantitative easing. Though the Fed has been vocal about inflation containment, probably we are at the end of the interest rate hikes. That does not mean the rates may fall in a hurry. They may continue to remain high for some time. But my guess is that at the same time next year, interest rates will be coming down.
Is it wise to invest through hybrid funds or multi-asset allocation funds? Why?
For an investor who wants to invest in a mix of debt and equity, hybrid funds with minimum 35 percent allocation to equity, work, as they are tax-efficient. Earlier, investors would go for a mix of equity funds, pure fixed income funds, and gold funds. Schemes investing a minimum of 30-35 percent in equity and around 30-35 percent in arbitrage are treated like equity funds. So, these, along with balanced funds, can also be considered by investors. Multi-asset portfolios can work for people who want reasonable returns with less volatility.
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What do you expect from stock markets, going forward? Which sectors will do well?
In India, stock valuations have reverted to long-term averages. Corporate earnings growth expectations in India are decent. Even after a slowdown, they are scaled down to 13-14 percent for the year, compared to 17-18 percent earlier. If you look at three years, India still is the best game in town. Our stocks are not cheap, but do not expect them to go cheaper. There is limited downside. I would hazard a guess that you'll probably see new highs sometime later this year.
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Among sectors, despite good earnings growth, valuations are still reasonable for banks. We continue to remain positive on banking. We recommended the banking sector in July last year. We are also positive for the domestic-facing capex-related sectors. You will also see private capex picking up sometime later. So, we are positive on the capex-related themes and real estate-related things because I think residential real estate, after a long lull, has picked up over the last one-and-a-half years.
Is it a good idea to invest in overseas equity?
US stock markets may remain choppy for some time. Investors should accumulate through systematic investment plans (SIPs). Consider mutual fund schemes that track broad-based indices such as S&P 500, instead of getting into direct equity investing.
Many high-value transactions have been reported in house properties over the last couple of years. Is it a good time to buy a house for self-use?
Some price increase has been seen in the last two years in some cities. But, for over a decade, real estate has not done much. Affordability has also gone up. Now the interest rates are up, but they were lower a year ago. Residential real estate prices are now reasonable, and the sector is now much more organised and regulated. This can be a good time to buy a house for self-use.
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