How to invest in times of uncertainty

From geopolitical unrest to spiraling inflation leading to steep rate hikes by central banks, several global factors have affected stock market sentiment over the past year. India’s economy is fundamentally better positioned and should continue to grow on a solid long-term basis. However, in the short term, it could be affected by world events. Given this mixed backdrop, investing in current market conditions can be challenging for a retail investor.

There are a few basics to consider when investing in these volatile times. First, start with the asset allocation and stick to your plan. If you are overweight equities, reduce allocation and if you are underweight equities, remember to build laddered exposure through the SIP.

If you don’t know how to go about asset allocation, look for plans that can do it for you. If you want to build exposure to equities and debt, opt for a dynamically managed asset allocation. If you’re looking to put your money in stocks, debt, and gold, you might want to consider a multi-asset class system. The fund manager will then manage the allocation in such a way that the investor can capitalize on the opportunities present in these asset classes.

If you are an investor looking to allocate to an equity fund, it would be optimal to opt for a value-oriented scheme. The stock was out of favor until September 2020, but once the market recovered from the pandemic-induced correction, it made a strong comeback. Often, in times of uncertainty, value strategies are a good investment because they focus on investing in sectors that make sense over the long term. The volatile times have opened the doors to several pockets of value across all sectors.

If you are a defensive investor, you may want to consider the dividend category. Dividend yield as a strategy tends to do well in an economic/market recovery phase as value release takes place. At the same time, an economic recovery is also underway, leading to earnings growth for reasonably priced stocks. This leads to a revaluation of these stocks, creating a win-win scenario for dividend-paying names.

Another way to play the defensive theme is to invest in a consumer-based fund. Consumption as a theme is secular in nature and an investor can consider investing in this theme at any point in the market cycle. This theme is home to a variety of industries, including automotive, pharmaceutical, FMCG, consumer durables, retail, and telecommunications, to name a few. With its growing population, consumer demand in India is expected to grow at a steady pace.

From a tactical allocation perspective, the export theme is interesting given the depreciation of the rupee. India’s IT, Pharmaceuticals and Autos are the major exporters to the US and will benefit from the strong tailwind the currency brings in the current scenario.

Finally, if you are an investor looking for capital investment opportunities, you can invest in asset allocation systems. Another approach would be to use features like Booster Sip and Booster STP to scale your investments and capitalize on market volatility. This feature allows an investor to deploy money based on the changing market environment.

Thus, if the market valuation increases, the amount deployed will be minimal and as the market valuation becomes attractive, the amount of funds deployed will be higher. As a result, the investor benefits from both cost averaging and value through this feature. Another alternative is to invest in asset allocation systems through which one can access several asset classes within the same fund.

Debt distribution

As the Reserve Bank of India is on the path to rate normalization, investing in floating rate bond funds would be optimal in the short term. This is because of its inherent nature of adjusting to rising interest rates and the coupons that accrue to investors as benchmark rates rise. Since floating rate securities have a positive correlation with rising interest rates, they provide much-needed cushion to the portfolio.

For an investor considering a long-term allocation to debt or for those unsure of where to invest in the debt market, a dynamic bond fund may be a valid option. An aggressive bond fund seeks to take advantage of interest rate volatility by managing duration. Here, the fund manager can manage the duration between one and 10 years, and depending on the interest rate scenario, the scheme can also invest in corporate bonds and G-Secs.

In conclusion, the way forward looks uncertain, but that doesn’t mean investors should sit on the sidelines. Depending on your risk appetite and asset allocation requirements, opt for plans that will help you make the most of every market situation.

(The author is the ED and CIO, ICICI Prudential Mutual Fund)

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