portfolio allocation | Nilesh Shah: Nilesh Shah on how to allocate portfolio between equity, bonds, gold & REITs now

When ET Now launched the Rise India campaign that dream kind of got supported and today we have seen massive FPI selling and yet markets have not corrected as much as it would have otherwise, thanks to domestic investors. It does not mean markets have not fallen. Of course, markets have fallen but there is a counterbalance emerging to FPIs by domestic investors and that is a matter of pride in the last 13 years’ journey.

Now that we are sitting at 15,300, 13 years from now, where do you see the markets headed? Any ballpark number that you have for the Sensex or for the Nifty?
I really do not want to predict where the numbers will be but if we capture the opportunities, then the growth in the next 13 years will be far ahead of what we have seen in the last 13 years in real terms.

In the last 13 years, inflation was in high single digits. In the next 13 years, despite the current phase, inflation will probably be in the low single digit. So to that extent, nominal returns will come down but the real return – if India captures its opportunities well – will be better in the next 13 years than the last 13 years.

We have shown our steel when it comes to IT or pharma. Going forward, where is the room for India to show the world where it stands and from the stock markets’ perspective, which are those sectors that now on could bear good fruits when it comes to returns?
One sector that will do well will be financial services. In India, even today, we spend a considerable part of our savings on the import of gold. On a net basis, India is an exporter of capital rather than an importer of capital. We have sent more money abroad for import of gold than all the foreign direct investment we have received.
We are like a poor man who wants to do blood donation even though they are in need of blood transfusion. Financial services, which will manage India’s savings whether it is banks, mutual funds, insurance companies or some other vehicles will continue to do well.

The second thing will be related to the manufacturing in India theme. We have proven our prowess in IT and generic pharma, but we are now seeing revival in India’s manufacturing. We were the seventh largest auto market in volume in 2014. Today we are fourth largest. We were the 12th largest manufacturer of mobile phones in 2014, today we are the second largest. We have to repeat what we did in automobiles, mobile phones in every other manufactured item.

In the current market situation, a lot of dynamics are at play. We are fighting with inflation, the crude is on the boil, rate hikes are happening. Going forward, what is your take on the markets? Once the market settles down, can we once again leap into that bull
market trajectory?
A lot will depend upon how events happen. If tomorrow there is further escalation in the Russia-Ukraine situation which impacts oil prices and commodity prices, undoubtedly our markets will correct further from here.

If we are unable to control inflation, then undoubtedly our market will be weaker. So a lot will depend upon how things shape up. In our kundli (birthchart) both rahu and ketu (evil planets) are higher oil prices. If oil prices go up 10%, our growth suffers by about 20 bps. If inflation goes up by about 40 bps, the market is in a challenging period. We need a little bit of luck in terms of lower commodity prices, especially oil prices, before market can recover.

Do you believe that going forward, the confidence of retail investors who are really serious with their SIPs will continue to grow or can the current market situation hit that as well? Second, is this a right time to enter into a lump sum payment like SIPs?
I really want to salute retail investors and lakhs of mutual fund distributors who have reached SIPs to the crore of retail investors. Today the mutual fund industry gets about Rs 12,000 crore in SIP flows. It is all thanks to the efforts of mutual fund distributors and the maturity of retail investors. Today also, most equity funds are delivering double digit SIP returns over three years, five years, seven years, 10 years and a 15-year period, though one-year returns are negative.

People have now realised that when markets are correcting, the SIP becomes more valuable. By putting in the same amount of money, one is able to buy more units of more shares and as and when the market bounces back, the SIP will start delivering better returns.

I think the experience of March 2020 really worked for investors. In Jan 2020, most of our equity funds were delivering high single digit to double digit returns In March 2020, we were delivering negative return for a three-year period, mid single digit returns for a five year period and similar returns over a 10-year period. Our returns would have halved by half and at that point of time. People who continued their SIP or who topped up their SIP are today enjoying double digit returns.

If you want to start SIP, today is the best time. Whenever you have money, it is the best time but do not start SIP with one year, two years or three-year horizon. Start with a five years-10 years horizon and do not be afraid if SIP returns are negative because SIP returns go through ups and downs but if you maintain your discipline, eventually you will make a real return.

Back then when we had that amazing bull run between 2020 and 2021, we kept on asking you how to build a portfolio in a bull market. But now, Nifty is 3% away from entering the bear market. What would be your suggestion for somebody who is looking to build a portfolio during the bear market?
Bear markets are sale markets. When I was a kid and we had to go shopping, my parents always used to wait for a sale. The merchandise never used to change, but in the sale you will get it at the cheaper price. That was the lower middle income mentality. Now the bear market is an opportunity to buy some companies at lower prices. A bear market should encourage investors to buy securities because you will be buying similar companies at much cheaper prices.

This is the nature of the market. Someday they will go up, someday they will go down. When I started my career there was one gentleman who advised me that as full moon and no moon are part and parcel of nature cycle, the same way teji and mandi are part and parcel of nature cycle. After teji, mandi will come and after mandi, teji will come. So, please maintain your dharma of asset allocation, be disciplined in your investment. If you stay invested with discipline. you will see better returns on your portfolio than today.

Finally as when it comes to maintaining the portfolio and you did touch upon the other asset classes as well. Maybe it is a good time to enter into mutual funds and direct equities as well but what about other asset classes would you be looking at?
As an investor, I will be equal weight to equity at this point of time and on every correction, I will be increasing my equity allocation as markets are below their historically average valuations. I will be overweight largecaps to begin with and marginal underweight small and midcaps but if the market continues to correct, I will be over with small and midcaps in the correction.

On the fixed income side, as rates are rising, either I will be in dynamic bond funds, where the fund manager manages the duration or I will be at the shorter end of the curve floating rate, bond fund or a short term bond fund so that rising interest rates do not impact my returns beyond a point.

On Gold I will allocate maybe 5% of my portfolio. I believe over a period of time, gold has the potential to outperform fixed income. So, these are broadly the three asset classes which are available but for an investor who can take direct exposure, I will recommend retail InvIT in lieu of their fixed income portfolio. REIT InvIT also provides slightly better returns with slightly higher volatility comparable to fixed income.

The Indian markets right now has outperformed the rest of the markets. The RBI has its own strategy, but they are also taking cues from the US. Indian markets are still trying to hold up at least by a couple of percentage points. Going forward, do you feel that in the next decade India has the potential to outperform the rest of the markets as well?
Over the last eight years we have delivered double the return of our emerging market peers. We have witnessed Covid, we are suffering from higher oil prices and in the last eight years, we have moved from being the world’s 10th largest economy to the fifth largest economy. We have increased our market share in global GDP from 2.6% to 3.2%. We have increased our share in global FDI from about 2.1% to 6.7%.

So clearly, despite challenges, we have done well. Going forward I have no doubt in my mind that if we capture our opportunities, if we deliver on growth which we have delivered in the past. If we deliver on governance which we have done in the past and if we add a tinge of green managing environmental and social, we will have a deadly combination of growth with governance and green. No other country can offer that kind of combination and our returns will be far better than any other peers.