What’s should be your strategy for primary market in FY25?

(Editor’s Note: The stock market has seen a stellar rise over the past 18 months. As part of special series Market Mavericks, News9 spoke with Nilesh Shah, managing director of Kotak Mahindra AMC to get his views on the way ahead for and how investors should approach it. Edited excerpts from the interview):

1) The stock market had been on a relentless upward move for the last year and a half. Where do you see it headed and what are the factors likely to impact in the near future?

A. In recent times, while other emerging markets were falling, India continued to outperform to such an extent that our weight in the MSCI Emerging Market Index moved from 8% to 12%. This prompted some foreign portfolio investors (FPIs) to book profits. There were also concerns over taper tantrum by the US Fed which led to some correction. The correction to a great extent can be attributable to the fear of the new Covid-19 variant which is a matter of concern for health authorities. Net-net markets were running a bit ahead of its fundamentals and taper tantrum, Covid variant, profit booking, all have contributed towards this correction.

2. Do you agree with those who say that there is disconnect between the market and the economy?

A. There is absolutely no such disconnect. Markets sometimes can get disconnected with the economy based on money power or sentiment, but not for long. Someone who is saying that for 18 months Indian markets were disconnected from the economy probably is not telling the truth or not accepting the truth. Markets are forward looking whereas the economic data is of the past. That is the point of disconnection. But markets will always go by economic fundamentals over a longer period of time.

3. Since markets have run up so much, should investors be cautious and reduce equity exposure, or, is there a possibility of losing out if the rally continues?

A. It is always difficult to predict market movement. Between March and September we were advocating investors to be overweight on equity because valuations were very cheap. At that time did we know that Nifty will touch 18,500? The answer is absolutely no! We have no idea where markets will be 1 year, 2 years or 3 years down the line. We were advising people to follow disciplined asset allocation, be overweight when equity markets are cheap, be neutral-weight when markets are fairly valued like it is today and be underweight when markets are expensive like they probably were in January 2008. At this point of time despite this correction, we believe markets are in their fair value. They were at the higher end of fair value at 18,500 Nifty. They are at the middle end of fair value at 17,000 Nifty and if Nifty goes further down it will be at the lower end of fair value. You can use this correction as an opportunity to increase your exposure (to equities) if you are underweight. And, if you are overweight on equity then this is time to take some profit home.

5. Since you said if you are underweight you should raise your equity level in your portfolio, where are the pockets of opportunity now and what are the sectors to avoid?

A. In the market, there is a red zone which is definitely avoidable. One is the penny stock counters where business fundamentals are way behind, and prices have been pushed to sky high levels thanks to social media push and concentrated buying. In most such counters distribution happens to gullible retail investors who believe price momentum will continue forever. So, stay out of penny counters at all costs. There are also a small number of stocks in which concentrated holders and low floating stocks have resulted in sky high valuations. These are good businesses, but available at a very high valuation. Avoid investing even in those counters because there might be price or time correction, or both, ahead. Other than this, we believe, the broad market is fairly priced and it is time to maintain neutral allocation to equity. From a market point of view we believe sectors like real estate and home improvement, industrial and capital goods and select financial services firms will outperform the market in the days to come.

6. There has been a spate of IPOs in recent days with a number of new age digital companies getting listed. Among them the PayTM listing was a bit of a fiasco as it tanked on listing day, though it recovered slightly later. What is your view on the pricing and the allegations that some of these issues were exorbitantly priced leaving very little for investors? What is your advice to investors looking at future IPOs?

A. Well, why did you apply into exorbitantly priced issues? When we walk on the road there is an Udipi restaurant which gives delicious south Indian dishes and there is a five-star hotel which also provides those dishes but at much higher prices. You don’t go to a five-star hotel if you cannot afford it. In the same way, you don’t have to invest into every single IPO. If you believe there is no value then don’t invest in those IPOs. You can’t expect that it is SEBI’s job to ensure that in every IPO investors will make money. If you are investing in the equity market, you don’t take a view of applying in IPO and selling on listing to make money. You have to invest in the company to make money over a period of time. So, an IPO market does not guarantee that you will always make money on listing. It is subject to market risk. Don’t apply in those IPOs where you don’t agree with valuation.

7. There has been a lot of controversy over cryptocurrencies. The government and the RBI are taking steps to regulate the market. What are your views on the crypto market?

A. When you are investing in something please be aware of the risk and return together. I read a newspaper report where someone committed suicide because of losses in cryptocurrencies. Now, it could be cryptocurrency, it could be the equity market, it could be anything, but when a human life is lost, I really feel sad. It happens because greed overtakes. It happens because you do not understand the risk which is associated with generating return. So my humble submission to every investor, every trader and every individual is that there is no free lunch in this world. Other than your parents no one is interested in your economic well-being. Please don’t assume that by investing or trading in cryptos, you will always make money. There will be volatility, there will be downside, there will be correction and you could lose capital. Please invest with very disciplined asset allocation. It is very important that when you go into an asset class like crypto you remember that this is a high risk and high return investment or trading. There are more than 9,000 cryptocurrencies. How many of them will survive? Probably in single digits! When you are investing in cryptos, safe keeping becomes very critical. Every day we hear about people losing cryptos because the hard drive crashed, because passwords are forgotten or because exchanges which were supposed to safe-keep disappear. Cryptos should not be more than 5% of anyone’s portfolio and one should go there with the ability to lose entire capital.

8. There has been a huge rise in new demat and SIP accounts in mutual funds. A lot of them would be new investors. What would be your advice for first time investors whether direct investors of mutual funds?

A. When you are investing directly you need to research companies. You can’t invest based on a Whatsapp or a Telegram channel forwards. That is not investing, that is trading, that is punting. You will lose a serious amount of money. That’s trying your luck not your skill. When doing SIP don’t go by returns of today’s era. Before the correction, my small cap fund would have delivered 22% compounded returns for 10 year SIP. That should not be leading you into investing in SIPs because in March 2020 at the bottom of the market the same fund would have delivered negative returns for three years and single digit returns for 5 years and 10 years. Because you could go through the agnipariksha of negative returns of 3 years in March 2020 you could enjoy a 22% compounded return in our small cap equity fund. Risk and return come together. Please learn from others’ experience so that you can invest with conviction. There will be times when your conviction will be tested. You will have to go through the agnipariksha. When you pass through agnipariksha, you will be able to enjoy returns.

9. How are you seeing the financiialisation of savings growing and the involvement of the lower economic rungs in the market and expansion into Tier-2 and Tier-3 cities?

A. India is a very large country and there is no homogeneousness among investors. There is a set of investors who are evolved, matured and financially more intelligent than fund managers like me. There are investors in urban India who do not know much about financial markets. They keep their savings in cash, in low yielding savings and in bank deposits. They invariably get cheated when they are lured to invest in collective investment schemes. Even in semi-urban and rural India many people are cheated when they are lured to invest in collective investment schemes. Cryptocurrencies have taken India by storm. There are millions of investors in semi-urban and rural India who are lured by the rapid rise in cryptocurrencies in last few years. How many of them understand risk and return we do not know and this is where we are thankful to SEBI, which helped us create a corpus for spreading financial awareness and financial knowledge. Our association, AMFI, came up with the ‘Mutual Fund Sahi Hai’ campaign. It is using celebrities and cricketers, to pass the message of systematic investment, disciplined investment, regular investment to investors. The mutual fund industry has more than 3 crore investors, we have more than 10.5 crore folios and we have more than Rs 10,000 crore coming in every month through systematic investment in our MF schemes. We believe we have done a good job in providing them returns and providing them financial independence. But when I look at the future, I feel we have barely scratched the surface. From 3 crore, I have to go to 30 crore investors. From 10 crore folios we have to go to probably 100 crore folios and from Rs 10,000 crore in SIPs we have to go to Rs 1 Lakh crore. This is the potential of India’s financialisation. I have to travel from India to Bharat. I have to expand from rich and high networth individual and middle class investors to bottom of the pyramid investors. I have to cover not only the financially knowledgeable investors, but also the financially illiterate investors. I have to convert traders to investors across India and Bharat. We have barely scratched the surface and we have to work harder and use technology to lower distribution costs to reach out to interiors of India, to every PIN code of India so that financialisation of savings can actually materialise.