Over the long term, equity funds give wealth-generating boost to one’s savings by giving inflation-beating returns, although in the short term they could be volatile.
With the market falling sharply recently, it may be bit of a challenge for new investors who entered the market in last 12 months as they may be experiencing volatility for the first time.
Swati Kulkarni, Executive Vice President and Equity Fund Manager, UTI Mutual Fund feels if investors understood the wealth generation benefits of equity investments over the long term, and also the importance of asset allocation, they will not waver from their financial goal. They will realise that corrections lead to getting more units for the same amount through SIP investment. So, they are averaging the cost at present and when market bounces back their returns will also improve.
In an interview with Moneycontrol’s Hiral Thanawala, Kulkarni talked about current valuations and earnings, steps you should take while reviewing the portfolio investing in international funds and more. Edited excerpts:
After sharp corrections in equity market where do we stand on valuations and earnings?
We have been experiencing an extended period of low single-digit growth in earnings of leading indices resulting in higher level valuation for quite long time. There is an expectation that the past single-digit earnings growth trend will catch up with the long-term average earnings growth of 12-13%. The recent corrections have brought down the PE multiples, but the macro situation has elevated the chances of downward revision to consensus earnings estimates. So, the earnings growth delivery is most important and equity markets should look forward to this.
What investment strategy have you adopted based on corrections happening now in equity markets?
The portfolio strategies are based on fund manager’s style and objective of the funds so short term fluctuations in equity market doesn’t lead us to change our long term views or positions in the scheme. For example, in UTI Mastershare we follow GARP (Growth at reasonable price style) and invest in companies with competitive franchise.
What are the steps that investors should take now while reviewing their portfolio?
Over a long term, equity funds give wealth generating boost to one’s savings by generating inflation beating real returns, although in the short term they tend to be volatile. Typically, Indian investors are underinvested in equity funds. What portion of savings can be invested in equity funds depends on one’s ability and willingness to take risk and his/her financial goals.
For short-term financial needs one needs to allocate in liquid funds. Having allocated savings in different asset classes and sub categories, investor should periodically review it i.e. what was the initial allocation and what it is currently.
For example, if one had 60% desired allocation to equity and that has increased to 70% post strong equity performance which may have also elevated the valuations, he/she may like to prune it back to 60%, conversely, fall in equity market makes the valuations cheaper and the allocation to drop below 60% requiring additional investment into equity funds to enhance the allocation back to 60%. Taking help from financial advisors can be a good idea to customise your financial plan and review it from time to time.
How well one generates long term wealth, depends largely on his/her disciplined asset allocation rather than timing the entry and exit in various asset classes.There are some equity schemes which have corrected sharply when we analyse YTD performance against the benchmark. If an investor has investment in such schemes what will be your recommendation?
Investors need to see what has led to such poor performance of a scheme. You need to analyse sector concentration risks and quality of the portfolio before making any change.
Generally, YTD performance is a short performance which shouldn’t alter your allocations. If you have invested in the scheme which is backed by good in house research process and sturdy fund manager’s experience then it may be recommended to hold on to the investment in your portfolio.
Does investing in international funds really help to minimise impact of rupee depreciation?
Investing in international funds enables you to take exposure to foreign market and foreign currency. So you are diversifying the market risk and taking on the exchange rate fluctuation risk. The total returns will be a combination of the foreign markets returns plus minus currency returns. If the INR depreciates after you invest, you gain on the currency and you lose if INR appreciates after you invest assuming the foreign market returns are equal to Indian market returns. If someone has a view that INR will further depreciate and that view turns out to be right later, he/she would have gained on the currency provided those gains are not eaten away by the underperformance of foreign markets to Indian markets.
UTI Mastershare has been around from three decades. What is an investment strategy in this scheme? Also, what made it popular scheme over the years?
UTI Mastershare, the first equity fund of India is large cap oriented equity fund. It invests in companies with competitive franchise by using GARP. The Fund has created wealth for its investors, as has beaten its benchmark while generating a CAGR of 15% since its launch in 1986. The consistency in performance has enabled the fund to create an uninterrupted annual dividend track record for the last 31 years, regardless of the bear phases of equity market. The wealth creation and the consistency are the key positives that have led to popularity of the scheme.Follow @thanawala_hiral