Where to invest Rs 10 lakh today? Small caps are overheated, says Shyam Sekhar of iThought

Shyam Sekhar, founder and chief ideation of iThought, a Chennai-based investment advisory firm believes that just about five to six mutual fund schemes are good enough for a good portfolio

Chennai-based Registered Investment Advisor (RIA) Shyam Sekhar may be one of the most recognisable faces in the Indian wealth advisory industry. But it wasn’t always so.

For the first 22 years of his professional life, he worked in an entirely different profession. He ran a paints manufacturing business, and was a paints formulator and technologist.

But Sekhar was always interested in equities and the stock markets. However, trading in equities was not a very respectable profession at the time in the conservative state of Tamil Nadu, where good old insurance schemes and fixed deposits were the favoured tools to build wealth.

After Sekhar graduated in 1990, he started trading with his own modest savings. He had cultivated his interest in equities over the years. And although he was busy with his paints business for over two decades, he finally took the plunge into equities and wealth management profession full time by founding his company, iThought in 2010.

In its initial years, iThought was a distribution firm that helped people invest in mutual funds (MF) and other financial instruments. In 2016, iThought got its licence as a registered investment advisor. iThought got its Portfolio Management Services (PMS) license in 2019. Sekhar is also actively involved in the investment scene in and around Chennai. Besides being part of the Chennai Investor Club, he has been the President of the Tamil Nadu Investors’ Association in the past.

In an interaction with Moneycontrol, Sekhar tells us where to invest our money today.

Equity markets have been volatile so far this year. Between the year’s peak of 60,611.74 that the S&P BSE Sensex hit in April, and the low of 51,360.42 that it touched in June, the Sensex has seen four peaks and three troughs this year already. Is this the right time to invest?
Yes, you should certainly invest because ‘waiting’ as a strategy has mostly failed.

Investing and (then) waiting is always a better strategy. This allows you to stagger your investment. You can keep your powder dry — in other words, have spare money for some impact investment whenever the markets fall later.

I have Rs 10 lakh to invest today. What do you recommend? I know asset allocation is specific to individuals, but give us broad guidance.
Put 60 percent of your money in equities. Invest the remaining in a mix of gold, cash and short-term debt funds.

There has been a lot of demand for international equities by Indian investors. Don’t you recommend investing in international stocks?
Within the 60 percent allocation for equities, I would invest 10 percent in international equities.

Within international equities, stick to US markets. Geopolitical uncertainties are much higher in other markets. And the bandwidth to track other markets is relatively low, unless you have clarity on their leadership, policies, direction of growth, their monetary policies.

Is it still possible to find good bargains in the large and small companies here in India?
It is easier to buy larger companies in India, but not as easy to buy smaller companies, because we see elevated valuations in the businesses that we like. Small companies aren’t as liquid too on the stock markets. Even though the valuations look cheap in several small companies, the trading volumes are not adequate; liquidity is absent.

Also read | How equity mutual  funds became an unlikely balm for COVID-induced financial woes

That is why many mid-cap and small-cap stocks have a high impact cost. Be very conscious of the impact cost; it is the excess you pay over the ideal price when buying your desired quantity of a stock.

That is why many experts suggest buying small-cap and mid-cap stocks through mutual funds. The only problem is that the corpus of many of these well-performing funds rise swiftly because investors chase performance. Before you know it, the mid-cap or the small-cap fund becomes a large-sized one.

The reason that small-cap funds are seeing so much inflow is because people believe that they will get higher returns in small-caps, rather than in large-caps. But this assumption may not be true at all times.

Today, the valuation of Indian small-cap companies is actually higher than the valuation of small-cap firms in more evolved markets than India. You should buy small-cap shares when they are available at throwaway prices. That's how you make high returns. That has been my experience.

Investors are throwing capital (money) at small-cap companies just to build a portfolio. That’s an unreliable way of investing in small-caps.

And that is why I will be extremely cautious on small-caps. I have remained cautious for quite some time. I will only buy businesses where I'm able to participate without much of an impact cost.

The universe of small-cap stocks is narrow and crowded. That has led to a stampede in the small-cap space.

Tell us how many mutual fund schemes are enough to build a solid portfolio?
I think about five or six will do.

Also read | Which mutual funds should you invest today? Check out MC30; Moneycontrol's curated basket of 30, investment-worthy, mutual fund schemes

I see a disturbing trend. A lot of people are investing on their own. You should not add too many positions (mutual fund schemes / stocks). Look at how investors bought US stocks and mutual funds last year. They bought it at the wrong time. If you look at how people bought technology stocks last year, they bought in at the wrong time.

Keep it simple.

Interest rates are rising, but experts say they may not go up much more. Should you invest in short-term bonds or is it time to invest in long-term debt?
The ideal way to invest in debt, going forward, is to keep cash on the side and deploy it, systematically.

Debt investing is going to be far more challenging in the next two years. You cannot look at past performance and invest in debt during this kind of a turbulent / evolving economic phase.

In the coming two years, your debt investments must align well with the emerging macro-economic scenario.

As interest rates go up, you need to increase the duration of your debt investments. Do not be rash in investing in debt. Watch the global interest rate scene closely, how it impacts the Indian markets, exchange rates, and so on. If you're not able to do it yourself, you must seek out an investment advisor.

Is rising inflation a threat?
In India, inflation may not rise too much from here. But it’ll take time for us to tame inflation; a lot depends on climate change and crop output also.

What are the biggest risks to the Indian economy and the markets?I think foreign inflows and outflows are a significant risk. Too much money coming in or going out at a time can be a problem.

The second risk is the exchange rate. India needs to manage its reserves well.

The third risk is that we need to have a baseline growth number. We cannot satisfy ourselves by comparing our growth with that of other nations.