Volatility an inherent part of equity market

Volatility is an inherent part of the equity market and it provides an opportunity for long-term investors to realign their portfolios. "Therefore, one has to prepare for volatility in the markets," says Sachin Trivedi, head (research) and fund manager, UTI MF, in an exclusive interview with Bizz Buzz

The industry has crossed the mark of Rs31 lakh crore of late in terms of AUM? What is the way forward?

An average Indian household holds around 95 per cent of its wealth in real estate, other physical goods, and gold and the residual five per cent in financial assets. But this is changing, and preference is increasing for financial assets over physical assets. I believe the trend towards the financialization of savings would continue in the longer term. India Mutual fund is well regulated savings option with an average investor. This investment option not only provides a high level of disclosures, but also offers good liquidity. Past return performance on various mutual fund schemes (equity) has outperformed other alternate investment options. It is also tax efficient choice for the investor. With increasing awareness, I would believe that the trend towards financialization of saving would improve, and within this, the mutual fund industry should also benefit.

The market has recently touched the 50K mark. What is your future outlook? I mean outlook on the current market scenario overall basket of market performance.

Markets generally tend to be forward looking and discount near term news unless they are surprise events. Therefore, post a deep correction in March 2020, it has started to focus on the economic recovery path, which was aided by stimulus packages. Corporate earnings performance for Q2 and Q3 FY21 has been generally ahead of the expectations. Many sectors have participated in this positive surprise. This performance has come on back of better sales and volume performance and tighter cost controls exercised by the companies. Some of this cost rationalization could be structural, to which investors can start ascribing higher value. Post this pandemic event, and I expect some larger players to benefit at the cost of small unorganized players. We expect these broad trends to continue. I agree that broader markets indices look expensive when we examine it from an earnings perspective, but these earnings are depressed due to pandemic related impact. However, on the price to book matrices, markets are in the fair value range. I would argue that given a positive outlook on longer term growth, equity as an asset class should outperform alternate investment options.

Investing a certain portion in the overseas market is a new trend these days. How do you see this trend when compared to the domestic market which is also doing very well?

Investing in the overseas market is always challenging, given regulatory restrictions and cost associated with the same. Yes, I agree, for investors with high net worth, who can afford to take high risk and have access to the right advisors, can diversify. But again, there is a regulatory cap on the absolute quantum of investment. At the same time, when we compare the performance of some of the widely available equity-oriented options (in overseas category) to retail investors, it is hard to conclude if these options are better than diversified domestic oriented equity mutual funds. In comparison, domestic equity oriented mutual fund schemes, which offer high growth potential, lower cost of a transaction, and strong regulatory framework should remain a preferred choice for the investor.

Navigating the volatility strategy for investors to combat volatility. Kindly explain.

Volatility is an inherent part of the equity market, and it provides an opportunity for long term investors to realign their portfolios. Therefore, one has to prepare for volatility in the markets. However, longer-term analysis suggests that equity as an asset class has outperformed alternate asset classes and has protected investors' money against inflation. Given this background, investors are better off allocating money towards equity assets, but the proportion of the same should be based on the investor's net worth, his or her income profile, and end goal they may have. Given the sharp recovery that we have experienced in the market, if asset allocation to the equity has gone higher than the target level, the investor may reduce and bring it back to the intended level.

How do you see the performance of UTI Transportation Logistics Fund – view on logistic and auto space in the current scenario.

The last financial year (FY20) has been a challenging period for Auto Industry wherein two-wheeler, four-wheeler, and M&HCV Industry has seen the sharpest decline in volume in the last four decades.

This decline persisted in FY21 as well. Bunching up factors like slowing income growth, increase in cost (led by changing emission norm and safety standards), uncertainty regarding the validity of registration of BS four vehicles, and expectation for lowering GST rates led to a decline in the volume of the industry. This decline in volume and operating deleverage have put further pressure on companies' profitability. However, India remains under penetrated market, where vehicle penetration is far less than in developed and some developing countries, and we have a long way to go. Our sense is that, long term demand drivers remain intact and volume growth should trend back to averages sometime in the future, which will improve the volume and revenue of the companies and improve the profitability of these companies.

Please throw some light on the sectors that are likely to do well in the near to medium term - sectors and themes that can over and underweight for portfolio strategy. Currently emerging investment opportunities road ahead for near terms.

Post pandemic, the shift of business from unorganized (small players) to organized (listed/ larger) players may have just got accelerated. We like companies benefiting from this trend. Further, we remain constructive on select private sector financial companies, which are adequately capitalized, have the distinct advantage of low-cost deposit, and are judicially perusing growth opportunities leveraging technology. We also remain positive on IT services companies, where the pace of growth got accelerated post pandemic. We also remain overweight on Automobile and Pharma space.