In an interview with Anjali Raulgaonkar from Capital Market Publishers, Rajat Jain CIO, Principal Mutual Fund said, Diversification is important, also clarity on goals and time-period of holding. If they are in place, then the investor would not panic.
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The bottom up picture for the companies is looking better as consumer demand is strong. This has been shown by strong volume growth numbers for passenger vehicles, two wheelers, paints, consumer durables etc. Also, while spends in infrastructure especially roads and railways has been strong, we are seeing increased strength in industrial capex even though it is quite sporadic yet. Hence while the bottom up scenario is looking up which will reflect in the earnings the macroeconomic situation has deteriorated. Partly it is due to the higher oil process which will impact the current account deficit, inflation and potentially the fiscal deficit. In addition, potentially higher spends by both union and state governments and moderate growth in tax revenue may keep fiscal deficit under pressure. Besides, political news flowahead of general elections next year also would be heavy. In such a situation, the large cap stocks should do well this year. However, in the next 2-3 years select midcaps should show fair earnings growth and should do well as a result.
We believe that stock selection combined with disciplined portfolio construction is the key to outperformance. We believe that companies with improving earnings, having a competitive position in their industrywith management having good execution abilities and acceptable corporate governance standards do well. Our analysts and fund managers study companies' bottom up and focus on identifying companies which meet these criteria's.
We think that for the average investor, having exposure to a diversified equity, midcap fund and potentially a large cap fund would cover most of the needs as far as equity is concerned. He may also look at Balanced fund as that would give him a blend of equity and debt where rebalancing of the portfolio does not include any tax cost for the investor. On top of this, if the investor wants he can look at thematic funds but as I said, for most investors the plain vanilla funds would have covered most of his/her needs. Also in case of thematic funds, the investor has to be agile as the rational for the theme may not last long. Also, these funds can be more volatile than diversified fund.
These would be companies where there are serious questions about their corporate governance and their quality of financial reporting. Also companies which do not have meaningful position in their industry segment as these would always be price takers and only do well in a very limited time period when the tail winds are in their favor.
5. How frequently you churn your portfolio and Why? Latest made changes in portfolio?
Our churn is fairly low and the average holding period of a stock in the portfolio would be around 2 years. However, if we had bought a stock for a fundamental reason and if the market price moves sharply we do takesome profit in such situations. Usually we hold the stock so long aswe think that the basic thesis in the company has not changed. And it would be able to grow as expected.
6. Given the dynamic economic and political situation, how can investors minimize their risk and maximize their returns?
Diversification is important, also clarity on goals and time period of holding. If they are in place, then the investor would not panic and take incorrect investment decisions which can hurt his/her portfolio performance.
7. What is your outlook on inflation?We think inflation could vary in the second half of the year. Of course oil prices & MSP announcements would be key to watch out for.
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