by
Mr. A. Balasubramanian, Birla Sun Life AMC
Since
the results of the general election came out, we have seen a lot of change in
the capital market & in expectations for India Inc. What has changed in the
recent past is the outlook towards India - which now is one of high hope and
optimism. Optimism and hope not only drives everyone to deliver the best
possible, but also helps improve the situation.
Equity
as an Asset Class..
Coincidentally,
this is also being echoed by the hope in the revival of the global economy.
Whenever the hope of revival of economy rises combined with optimism, equity as
an asset class does well.
Ultimately,
it is consumer sentiment that fuels economic growth. This combined with focus
on stepping up capital allocation towards building infrastructure helps create
opportunities for new jobs, more demand for raw materials, increased labour
activities and so on.
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| A. Balasubramanian, Birla Sun Life AMC |
This ultimately drives profitability of companies that
operate in the market; which in turn improves the confidence of companies to
either reward shareholders or look at making fresh commitment to take the
business to the next level. Indian industry today is at the cusp of such a
level. I would imagine a phase of consolidation where we prepare ourselves for
only greater growth as we go forward.
There
is a widespread belief that Indian companies will do far better than the last
few years. We used to say that India has grown despite the challenges. Now when
government policies and execution focus changes seriously, there will be a
greater need to believe in a better outcome as we move forward.
Therefore,
the probability of earnings upgrade for Indian companies go up tremendously
under these circumstances. Whenever there is a probability of rise in earnings,
markets remain firm with less volatility combined with higher predictability.
Risk-adjusted
return..!
If
government finances improve on the back of moderation in inflation, overall
growth momentum will further get a fillip through monetary policy action in the
form of an interest rate cut.
Under
these circumstances, it is imperative to have capital allocation in various
asset classes. Just as corporates allocate capital in various businesses on an
ongoing basis, investors, too, have to look at allocation into various asset
classes to generate better risk-adjusted return on their investment.
One
of the asset classes in a rising economic growth and falling inflationary
scenario that does badly is gold. Gold as an asset class does not carry any big
merit to be part of the investment portfolio of investors. Any investment in
this class needs to be made keeping in mind ‘future needs’ towards specific
purposes such as weddings, etc.
We
have seen real estate as an investment also delivering the best possible
returns in the last decade or so. While the government on one side looks to
lift the economy, it may also focus on increasing the supply of housing
projects, increasing the state governments' revenue in the form of tax and
stamp duty and, finally, setting up of a real estate regulator to bring in
uniform treatment across the country. Therefore, it has to make investors look
at this asset class more on a need basis rather than only as an investment
opportunity.
Equity and Fixed Income..
This
leaves two other asset classes to be part of the investment portfolio, that is
Equity and fixed income. It is believed that both the asset classes should do
well going forward. On one side, earnings of companies are likely to rise on
the basis of improved economic conditions, both globally and locally.
On
the other side, efforts to control inflation will yield result in lowering of
interest rate as we move forward. This obviously makes a compelling case for
investing in both these asset classes.
The
change in long-term capital gain tax period from one year to 3 years brought
about in the recent Budget, has changed the outlook for investing in both these
asset classes keeping in mind the tax applicability on such investments.
While
one needs to look at both debt and equity asset classes in the portfolio, the
underweight exposure to equity needs to be corrected upward, by increasing the
allocation to diversified equity mutual fund schemes.
Most
of the time, investors have questions on how to go about choosing a scheme.
While it is good to ask these questions, it is also to be remembered that no
one asset class performs in a linear fashion, that is in a single straight
upward graph. That being the reality, investment in various equity products
needs to take into account this behaviour by having exposure to large cap,
multi-cap, mid-cap and balanced funds.
Each
of these categories focus on investing in a certain segment of the market and
all of them are in businesses poised to deliver long term return to
shareholders/investors. Therefore, investing in equity should also be in a
basket of schemes either within the same mutual fund, or across a basket of
multiple mutual fund schemes.
As
far as fixed income goes, given the interest rate view, there is a need to look
at open-ended fixed income schemes right from short-duration funds to
medium-duration funds.
The
choice of getting stable income through fixed maturity plans (FMPs) has now
shifted to three years from one year previously. When we know very well that
the tax benefit has now shifted to three years, it makes all the more sense to
increase the allocation towards open-ended fixed income schemes such as Liquid
Plus, Short and Medium Term Plan and Dynamic Funds.
Invest
in Installments or Lumpsum..!
Debates
around valuation, the right time to invest, whether to invest in installments
or lumpsum can be addressed by first making a beginning and then continuing the
discipline of investing at all periods.
The
overall outlook for better days ahead has increased strongly, supported by
commitment to take the Indian economy to the next level of growth. This
warrants us to have faith in our asset allocation, so as to benefit reasonably
well from such allocations.
About the author..
The
author Mr. A Balasubramanian is CEO at Birla Sun Life Asset Management Company
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