How to invest in uncertain times

From geopolitical turmoil to rising inflation leading to steep interest rate hikes by central banks, several global factors have impacted stock market sentiment over the past year. The Indian economy is fundamentally better positioned and should continue to grow on a solid basis in the long term. In the short term, however, it could be affected by global events. Given this mixed background, retail investors can find it difficult to invest in the current market conditions.

There are some basic principles to keep in mind when investing during such volatile times. Start with asset allocation first and stick to your plan. If you’re overweight equities, reduce the allocation, and if you’re underweight equities, consider staggering exposure via SIP.

If you’re not sure how to go about allocating your assets, opt for systems that can do it for you. If you want to gain exposure to equities and debt, opt for a dynamically managed asset allocation scheme. If you want to invest your money in stocks, debt and gold, you can consider a multi-asset category system. The fund manager will then manage the allocation in such a way that the investor can take advantage of the opportunities presented by these asset classes.

If you are an investor looking to invest in an equity fund, it would be optimal to opt for a value-based model. Value had fallen out of favor by September 2020, but made a strong comeback as the market recovered from the pandemic-related correction. In uncertain times, value schemes are often a good investment because they focus on investing in sectors that make sense over the long term. The volatile times have opened doors to multiple pockets of value across industries.

If you’re a defensive investor, you might consider the dividend category. Dividend yield as a strategy tends to perform well in an economic/market recovery phase as value unlocking occurs. At the same time, an economic recovery is also underway, leading to earnings growth for reasonably priced stocks. This causes such stocks to be re-rated, creating a win-win scenario for dividend-paying names.

Another way to play the defensive theme is to invest in a consumption-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 spans a variety of sectors including automotive, pharmaceutical, FMCG, consumer durables, retail and telecom to name a few. Given the growing population, consumer demand in India is likely to increase steadily.

From a tactical allocation perspective, the export theme is interesting given the depreciating rupee. Indian IT, pharmaceutical and automotive industries are major exporters to the US and will benefit from the strong tailwinds the currency offers in the current scenario.

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

So if the market valuation increases the amount staked would be minimal and if the market valuation becomes attractive the amount of funds staked will be higher. As a result, the investor benefits from both cost and value averaging through this feature. Another alternative is to invest in asset allocation systems that give you access to multiple asset classes within a single fund.

debt distribution

With the Reserve Bank of India on the way to normalizing interest rates, investing in floating rate bond funds would be optimal in the short term. This is due to its inherent ability to adjust to rising interest rates and coupons accruing to investors as benchmark interest rates rise. Because floating rate securities have a positive correlation with rising interest rates, they provide the portfolio with a much-needed cushion.

For an investor considering a long-term allocation to debt, or for those unsure where to invest in the debt market, a dynamic bond fund can be a worthwhile option. A dynamic bond fund seeks to profit from interest rate volatility by managing duration. Here, the fund manager can manage duration between 1 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 stand on the sidelines. Based on your risk tolerance and asset allocation needs, choose programs to help you make the most of any market situation.

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