How to invest in uncertain times

From geopolitical unrest to spiraling inflation leading to sharp interest rate hikes by central banks, several global factors have weighed on stock market sentiment over the past year. The Indian economy is better placed fundamentally and is likely to continue to grow on a stable basis in the long term. In the short term, however, it can be affected by global events. Given this mixed backdrop, investing in the current market conditions can be challenging for a retail investor.

There are some basic principles that one should keep in mind when investing in such volatile times. First, start with your asset allocation and stick to your plan. If your stocks are overweight, reduce allocation and if your stocks are underweight, make sure to build exposure in staggered manner through SIP.

If you’re not sure how to handle asset allocation, choose schemes that can do it for you. If you want to build exposure to equity and debt, choose a dynamically managed asset allocation scheme. If you want to park your money in equity, debt and gold, you can consider a multi-asset class scheme. The fund manager will then manage the allocation in such a way that the investor can take advantage of the opportunities available in these asset classes.

If you are an investor looking to invest in an equity fund, it would be optimal to choose a value oriented scheme. The value was out of favor until September 2020, but after the market recovered from the pandemic-induced correction, it made a strong comeback. Often in times of uncertainty, value schemes are a good investment because they focus on investing in sectors that make sense in the long term. The volatile times have opened doors for several pockets of value across sectors.

If you are a defensive investor, then you can consider the dividend yielding category. Dividend yield as a strategy tends to do well in a phase of economic/market recovery when value unlocking takes place. At the same time, there is also an economic recovery, leading to earnings growth for reasonably priced stocks. This leads to a revaluation of such stocks, making it a win-win scenario for dividend-bearing names.

Another way to play the defensive theme is to invest in a consumption-based fund. Consumption as a theme is secular in nature and an investor can consider investing in this theme at any point in the market cycle. This theme contains a variety of sectors, including automotive, pharmaceuticals, FMCG, consumer durables, retail and telecommunications to name a few. With the growing population, consumption in India is likely to grow at a steady pace.

From a tactical allocation perspective, the export theme is interesting in light of the depreciating rupee. Indian IT, pharmaceuticals and automobiles are major exporters to the US and will benefit from the strong tailwind the currency provides in the current scenario.

Finally, if you are an investor looking for lump sum investment opportunities, you can invest in asset allocation schemes. Another approach would be to use features like Booster Sip and Booster STP to increase your investment and take advantage of market volatility. This feature allows the investor to have money available based on the changing market environment.

So, if the market valuation rises, the amount deployed will be minimal and as and when the market valuation becomes attractive, the amount of funds deployed will be higher. As a result, the investor benefits from both cost and value averaging through this feature. Another alternative is to invest in asset allocation schemes through which one can gain access to multiple asset classes within a single fund.

Debt Allocation

As the Reserve Bank of India is about to normalize interest rates, investing in floating rate bond funds would be optimal in the short term. This is due to its inherent nature to adjust to rising interest rates and coupons that accrue to investors when benchmark interest rates rise. Since floating rate securities have a positive correlation with rising interest rates, it provides a much-needed cushion to the portfolio.

For an investor considering a long-term allocation of debt, or for those unsure of where to invest within the debt market, a dynamic bond fund can be a worthy option. A dynamic bond fund seeks to take advantage of interest rate volatility through duration management. Here the fund manager can manage a duration between one and 10 years and based on the interest rate scenario, the scheme can also invest in corporate bonds and G-Secs.

In conclusion, the path forward looks uncertain, but that doesn’t mean investors should sit on the sidelines. Based on your risk appetite and asset allocation requirements, choose schemes that will help you make the most of any market situation.

(Author is ED and CIO, ICICI Prudential Mutual Fund)

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