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Volatility brings opportunities: Mittul Kalawadia of ICICI Prudential Mutual Fund


Mutual fund investors, especially the new ones, are extremely nervous about the current market. They can make little sense of topics like historically higher inflation, steep rates, among other things. Sure, everyone remembers their high school lessons, but how these factors will play out in the market is something investors are keen to know. Shivani Bazaz of ETMutualFunds spoke to Mittul Kalawadia, senior fund manager, ICICI Prudential Mutual Fund, to understand the implications of these factors in the lives of regular investors.
Edited interview.

Everyone is talking about inflation and steep rate hikes these days. What are your views on inflation and rates, both on the domestic and global front?
The worst in terms of inflation seems to be behind us in the Indian context. While inflation is a worry there are several indicators suggesting that some part of goods inflation is close to peaking out as commodities have corrected. Crude and few agri commodity prices are elevated but are expected to correct over time. On the other hand, in the US, wage and services-related inflation remains strong, which is where the US central bank policies will play an important role. In terms of rate hike, there is an element of risk in terms of a higher hike in the upcoming meeting but the road ahead will be data dependent as the RBI indicated. Globally too, central banks have indicated that they will rely on data to change their stance so rate hikes may continue till they see moderation in data.

Would you please explain for our new readers how higher inflation and interest rates would impact their investments?

The impact of inflation varies depending on where we are in the economic cycle. In the initial phase of inflation, equities tend to do well. But as inflation spirals out of control, central banks initiate policy measures to rein in inflation. This brings nervousness to equity markets making it volatile. At the same time, higher interest rates lead to a demand slowdown which impacts listed stock’s valuations. In this phase, investors tend to worry about potential recession also, which affects general market sentiment. This is how relatively higher inflation tends to impact investments.

When it comes to increasing interest rates, the adverse impact of these will be felt by high leverage companies. So, investors should stay away from highly levered companies because their borrowing costs will go up, impacting company’s earnings. Also, rising interest rates could induce a demand slowdown which will impact certain sectors more than others.

Huge volatility is making everyone, especially new investors, extremely nervous. Do you think investors should be prepared for more volatility in the coming days?

For an investor committing to equity investing, he/she should understand that markets are never going to be linear in nature; volatility is a part and parcel of equity investing. The thing to remember is volatility brings opportunities. So, one should not get unduly worried about it. The focus should be on adhering to asset allocation and building a robust portfolio with fundamentally strong companies. Post this step one has to be patient to reap the long term benefits of equity investing.

The near-term view is that the market is likely to be volatile given the evolving geo-political and macro development both in India and at a global level. If the market corrects and valuations turn comfortable, investors should not shy away from upping their quantum of investment but the same should be done in a staggered manner.

Will RBI hike interest rates sharply? How can investors prepare themselves for higher interest rates? A higher interest rate would hit the profitability of companies. Does that mean investors should lower their return expectations in 2022?

There is a general consensus that RBI will hike rate over the next couple of policies. Post the steep Fed rate hike, the likelihood of a similar rate hike in India is much higher which is in line with what the guidance has been and so no surprises here. On a year-to-date basis, the market has seen over a 10% correction already. From here on, valuations appear to be better than what it was six months back. From an investor perspective, the aim should be to systematically invest in a staggered manner over the next one year as there will be several opportunities given the market volatility.

Where can investors invest today?

When investing, investors should always be cognizant of one’s risk profile and investment horizon. Given the market volatility, investors (especially those with low/moderate risk or lacking time/knowledge to do asset allocation) can consider investing in hybrid schemes or asset allocation schemes wherein the investment is spread across multiple asset classes. For those looking at equity schemes can consider flexicap category schemes as it has the flexibility to invest across market capitalization. Dividend yield and exports & services is another category of schemes one can consider. Continue with ongoing SIPs and if an investor is ready to stay invested for more than decade, one can consider investing in mid and smallcap schemes.

New investors are likely to face a challenging year. What would you tell them?

Stick to an investment process and do not use leverage to invest into equities. Maintaining investment discipline is of utmost importance during volatile times. Refrain from speculating and investing short term funds into equities. Invest into equities only with a long- term horizon and your patience will be rewarded with encouraging risk adjusted returns.



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