Mutual Fund Investment: Dual Advantage of Equity & Debt..!

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. 

 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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