Investing in the times of uncertainty

Investing in the times of uncertainty
Nimesh Shah, MD & CEO, ICICI Pru AMC
Over the past one year, several global factors, including geopolitical unrest and spiralling inflation across developed markets that led to sharp rate hikes by global central banks, have had an impact on Indian equity market sentiment.

In spite of this, it is undeniable that the Indian economy is in a better position fundamentally and is more likely to grow steadily in the long run. However, in the short term, global events may lead to more uncertainty. Hence, investors need to moderate their return expectations and not invest in equities for short-term gains. We continue to have a positive outlook on stocks for the medium to long term and expect both the economy and markets to deliver.

Given this mixed backdrop, investing in current market conditions can be challenging for a retail investor. However, there are some basic principles one should be mindful of when investing during such volatile times.

Investing across asset classes

Consider using asset allocation schemes for lumpsum investment opportunities that will divide your holdings among different asset classes. If you want to increase your exposure to debt and equity in this case, choose a dynamically managed asset allocation strategy.

A multi-asset category scheme is an option if you're looking for allocation to equity, debt and gold. Based on the shifting market environment, the fund manager will manage the allocation in either of the funds so that the investor can take advantage of the investment opportunities offered by these asset classes.


Another strategy would be to stagger your investments and take advantage of market volatility by using features like Booster SIP and Booster STP. An investor can use this feature to deploy funds based on the shifting market conditions. Therefore, if market valuation increases, the amount of funds deployed would be minimal, and as and when market valuation turns attractive, the amount of funds deployed would increase. The investor benefits from both cost and value averaging as a result of this feature.

Value investing and investing in defensive themes

Now, if you are an investor looking to allocate to an equity fund, it would be best to choose a value-oriented scheme. Value was out of favour until September 2020, but after the market recovered from the pandemic-induced correction, value as a theme made a powerful comeback.

Value themes often make for a good investment during uncertain times because they focus on investing in sectors that are out of favour but have potential long-term value. The erratic economic climate has created numerous value pockets in various sectors. By investing in a value-oriented scheme, an investor may profit from these.

If you are a defensive investor looking to allocate funds to defensive themes, a dividend yield category or a fund focused on consumption can be considered. As value is being unlocked, dividend yield as a strategy typically performs well during an economic or market recovery phase.

At the same time, an economic recovery is underway, which is causing earnings growth for stocks with fair prices. This results in such stocks being rerated, which ensures a win-win for dividend-yielding names.

Purchasing a consumption-based fund is another way to play the defensive theme. An investor can consider investing in the consumption theme at any stage of the market cycle because it is secular in nature. This theme includes a number of industries, including automotive, pharmaceutical, FMCG, consumer durables, retail, and telecommunications, to name a few.

From a medium to long term perspective, India's consumption demand is likely to increase steadily due to its expanding population. Therefore, an investment in the consumption theme will be a defensive play in the portfolio if you are an investor looking to stay invested over the long term.

The export theme is interesting from the tactical allocation point of view, in light of the depreciating Indian rupee. The major exporter industries to the US —viz. Indian IT, pharmaceuticals, and automobiles, will benefit from the strong tailwind the currency currently offers.

Don’t ignore debt

With the RBI moving toward rate normalization, the road for debt appears to be an interesting one. Investing in floating rate bond funds would be the best course of action in such an environment from a short-term standpoint.

This is due to the fact that it is built to adjust to rising interest rates and coupons that accrue to investors as the benchmark/overall RBI rates rise. The much-needed necessary cushion for the portfolio is provided by floating rate securities, which have a positive correlation with rising interest rates.

Dynamic bond funds can be another worthwhile option for investors who are thinking about making a long-term allocation to debt or who are unsure of where to invest, given the evolving macroeconomic conditions. By managing duration dynamically, a dynamic bond fund looks to profit from interest rate volatility.

The scheme can also invest in corporate bonds and G-Secs based on the interest rate scenario, and the fund manager can manage durations of 1 to 10 years in this case.

In conclusion, the near future appears uncertain, but that does not mean investors should stay on the side lines. Based on your risk profile and asset allocation requirements, choose programmes that will enable you to take full advantage of any market situation.

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