‘Voltility provides an opportunity for investors to build wealth’

In the current market scenario, how do you think an investor should invest?

There has been a lot of interest and participation from retail investors over the past few months. We have seen many new investors enter the market for a variety of reasons. With interest rates and inflation at all-time lows and increased liquidity, we have seen a rally in the market. This is in stark contrast to the massive improvement we saw 18 months ago. Now such volatility provides an opportunity for investors to build long-term portfolios and build wealth. We believe it is very difficult, almost impossible, to time the market at any given time. It’s like the flip of a coin with a 50-50 chance of a head or tail landing. So taking entry or exit calls or trying to avoid market correction is a futile exercise. In most market conditions, and many more now, investing requires a great deal of discipline. Developing the discipline to stay invested through various market cycles will help investors harness the power of compounding, known as the eighth wonder of the world.

Speaking of the power of compounding, how should young investors start their investment journey?

Asset allocation is often referred to as the holy grail of investing and rightly so. Asset allocation suited to your needs and risk appetite will help you deal with market cycles and build wealth. Equity can be a focus for someone starting their financial journey early in life. With increasing age and financial responsibilities, a person can start investing in loans, real estate and other alternative investments. We often say that your percentage of equity allocation can be 100% minus your age. For someone out of college and on their first job, a disciplined way of investing at least 30-35% of earnings will ensure that financial goals are met in the future.

How can an investor create a diversified portfolio that balances wealth creation and security in the current low interest market scenario?

There are mainly two options for an investor looking at equity investing – stocks and mutual funds. When it comes to stocks, the risk is high and one may not have the time and understanding to do the necessary research. This is where mutual funds managed by qualified fund managers come into play. Even within mutual funds, an investor can diversify investments across geographic regions, size of companies, and industries. Investors with low risk appetite can consider large cap funds while those with a slightly higher risk appetite can consider multi cap, flexi cap and small cap mutual funds. International mutual funds and fund of funds investors value investments in other geographies such as the US, China, Japan etc. It is a good way to diversify within equities.

Coming to equity, how should investing in an IPO become a part of an individual’s portfolio?

IPOs are a subset of the equity world and there are interesting opportunities in the market right now. Until now only private equity and venture debt investors had access to new age tech, consumer tech and education tech companies. However, recent IPOs are giving retail investors an opportunity to invest in such high potential opportunities. However, as of now these companies are only focusing on building their customer base and creating customer experience. Thus, many companies do not have positive cash flow or profits and therefore investors should be careful. It’s important to understand that with so little past history and data, these companies can either be long-term wealth makers or close. Therefore, it is important to understand the long-term prospects, future cash flows and business model before investing.

How to go about debt allocation in the portfolio?

Debt allocation in a portfolio is for fixed income and security. We are witnessing a cycle of low interest rates all over the world and there is not much opportunity in the loan category which yields 7-8% per annum like a few years back. Investors should not take on unnecessary debt risk just to earn returns and instead aim for capital conservation and some small fixed income component.

You can listen to the full interview Here.