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Saving is important, asset allocation or SIPs take care of rest: S Naren, ICICI Pru AMC

I am always fond of market volatility because then people do not forget the word ‘risk’.

ET Now|
Updated: Nov 25, 2019, 08.12 AM IST
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That was not met by this condition because if you are getting money monthly through whatever route, it does not signify that you are at the extreme bottom.
Maximum mistakes happened in 2017 when suddenly people said smallcap is the new gem. If you ask me, you do not need to time the market, says , S Naren, ICICI Prudential AMC at at the ETMarkets Global Summit in Mumbai on Friday . Excerpts from an interview with Pankaj Poddar of ETNOW.

How would you categorise the last 12 months because there has been a lot of volatility in the markets but at the same time inflows have not been very volatile.
S Naren: That is in equity. If you look at credit risk as a category, barring us, no one got money, others lost money. So, if you ask me, normally when any asset class is at its bottom, you are not likely to get money and that is why you require to see equity becoming a “thumping-the-table” asset class! That was not met by this condition because if you are getting money monthly through whatever route, it does not signify that you are at the extreme bottom. That does not mean that the markets are not more attractive than before.

But I would say, it met all my requirements because in credit you had a situation where valuations were attractive, flows were negative and cycle was very interesting because every day people were worried about what was happening. I used to tell people that equity market is very interesting. Jet Airways was trading at above Rs 100 in the share market but you could not take a flight! If you had put an FD in Dewan Housing, you are not getting your money back but the share was trading at triple digit rupees! If the equity market has been at the bottom, we would not have these kind of opportunities. That’s why I would say the equity market never went to extreme low in the aggregate.

So that is why the flows just continue?
S Naren: Yes.

But when look at the SIP flows, do you get a sense that equity as an asset class is preferred via mutual funds versus earlier?
S Naren: Clearly, I have been part of the broking industry from 1994 to 2004. Somehow what happened was in that phase, the broking industry found it difficult to create models where people could make money and somewhere the whole business was about trying to earn brokerage. I think in recent times, with people moving away, more cash trading models are being created as well.

The mutual fund industry that way was always very investment oriented and in my opinion exit loads and other things also contributed to the fact that you could not trade mutual funds; you had to invest in mutual funds. Thanks to various things that the regulator did, we have created a much more investment oriented approach in mutual fund industry. The entire IFA and wealth management community also somehow managed to create a habit of saving through SIPs.

It is one of the most extraordinary good decisions that have happened to the investor and the mutual fund industry. I believe the investor will gain a lot but you have to remember that they cannot give up if the market falls. The day people close SIPs when the market falls, then it is a failure and that is something I am going to watch out for. Two years back. when we used to be negative on smallcaps and midcaps, people would ask how do I invest in the next 20 years through SIP? I would say SIP in small and midcaps and we never had a smallcap fund.

I hope all the people at that point of time who used to say that I want to do SIP for 20 years, genuinely believed that and they did do SIPs for the next 20 years, now 18 years.

Everybody looks to time the market. But when you are really looking for 15-year, 20-year-long SIP, does the timing factor on any sort of index or asset class really matter?
S Naren: If you are doing SIPs, there is no need to time the market. What typically happens is suddenly people say I want to look at this theme. Leaving aside general purpose funds, they will say I want to do this theme. Maximum mistakes happened in 2017 when suddenly people said smallcap is the new gem. If you ask me, you do not need to time the market. You do not need to bother about timing. But if you are going to invest in the fourth year, then you have to worry because that fourth year of fixed deposit returns forces you to forget risk management. That is why I am always fond of market volatility because then people do not forget the word ‘risk’.

On the other hand if you have long periods where markets are not volatile, people forget the word risk.

You say there is value in stocks or growth stocks which are highly priced at this point of time and so the markets are extremely polarised. What sort of opportunity does that give to mutual funds because there are certain stocks which are just not seeing re-rating and there are certain sectors and stocks which are almost at an all-time high?

Value funds have stopped getting money and that is a clear sign that value is in a very interesting position. If you look at the value category, it was getting a lot of money two to three years back. Now it is getting no money. I do not know whether it is redemption. But I would say that the opportunity does come out of that and that is the challenge of investing.

Investing challenge is not about knowledge, it is about battling the temperament that exists at that point of time and today value is very cheap. I would love to see whether people take the trouble of investing in all the value funds in the market because value is very cheap.

A lot of people look at the risk taking ability of that individual. How does one decide the asset allocation? Let us just leave out real estate. Between equity, debt and gold -- how should one allocate?
You should leave it and choose a fund which can do all three and not bother about trying to time that. That would always be best because logically there are all kinds of rules like doing 100 minus age should be your equity allocation. But my view is markets are too volatile. If you had asked me post Lehman whether equities is risky, the answer would have been no. But in 2007, I felt that equities was risky even to a young investor and I would have said yes.

So for me, risk is a function of valuation. I believe that I used to tell a lot of people that real estate is a risky asset class. But somehow, I have come to a conclusion that a few years from now, I am going to say real estate is a much less riskier asset class than it was. I believe risk for me is a function of valuation. In 2017, most people believed that smallcaps is not risky. Today for example most people think that credit is riskier than equity. But that is not true.

So, somewhere past returns play a role in people thinking what is the risk of the asset class. It should not be so. In fact, if past returns are very low in an asset class, I actually feel more comfortable that it is a lower risk asset class.

Because the risk is factored in?
S Naren: Yes, risk is factored in. Today, in case of credit, clearly risk is factored in. It is not that the risk of credit goes away, the name itself suggests that. But the fact is risk gets factored in. There are times when risk gets factored in. Today, for example, when we make statements on quality stocks, the reality is they are the best companies of India. The problem is not with the companies, the problem is with the valuation. The companies are the greatest in India.

Just look at the markets in terms of Nifty and the headline numbers. The GDP numbers, defaults by big companies -- all news is bad but markets are at an all-time high. What do you make of this situation?

If I had to look at one simple way to invest, it is investing when GDP is very low. If you go back to 2002, GDP was doing very badly and in 2007, GDP was doing very well. So, one should invest when GDP growth is very low and take out money when GDP growth is very high. That is a simple way to invest. Right now, the problem is that GDP growth is low but market valuation is not as cheap as 2002 or 2008 post Lehman. That is a challenge and that is why I would say that today value stocks seem to reflect GDP growth. In my opinion, if you invest when GDP growth is low, you will normally make money. This time you cannot do it in everything. But you can still do it in value.

One of the things people forget is that equity is an asset class to be invested when times are bad and to be taken out when times are good, if at all. That creates the challenge of investing.

Some of the consumption stocks have continuously done well. If India has to be a $5-trillion economy, the opportunity is very large. How would you look at that?
S Naren: In 2007, people felt that roads will get constructed, cars would not get sold. Today people feel that cars will get sold, roads would not get constructed. We will always go through these cycles and that is why I believe the advantage is how we have all had jobs also. It is very difficult to perceive that in 2007, most of the construction companies were trading at record valuations. Pharma, consumer stocks, auto stocks were trading at very low valuations. Today 10-12 years later, it has reversed. Today I ask people, can you have a situation in the next 10 years when power demand would not grow but only car demand will grow. People tell me definitely power demand will grow but most people are very uncomfortable investing in a power stock.

If any investor is trying to make an asset allocation at this point of time, what are the four or five basic things one should always keep in mind?

S Naren: I will say that the most important thing is saving. We all grew in pre-liberalisation India. In pre-liberalisation India, we were always very cautious. Today, one of the worries I have is that too many people are taking loans on the basis of future income. In a country like India, it is important to save. I would say the first and most important requirement of the younger generation will be that they should start saving from the first month of when they start working. That is more important.

Second, choose a SIP in any fund which they want and then start with that process. That is why I would say that anyone should start at this point of time. I would say that if there is an asset class which becomes very cheap, they should have the guts to buy that asset class. Those are the things I look at. What worries me is that in Japan people save, companies save and so the government can spend. In India we have a situation today where the government also has a fiscal deficit and so people cannot say I will not save.

You cannot use the Japanese experience because Japan has a situation where people and companies have saved a lot of money over the last 50 years. Saving is more important, asset allocation or SIPs take care of everything and that is all I would say.

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