How to invest in uncertain times

From geopolitical unrest to spiralling inflation leading to steep rate hikes by central banks, several global factors have affected the equity market sentiment over the past year. The Indian economy is better placed fundamentally and is likely to continue to grow on a strong footing in the long term. However, in the short term, it might be affected by global events. Given this mixed backdrop, investing in current market conditions can be challenging for a retail investor.

There are some basic principles one should be mindful of when investing during such volatile times. First, start with asset allocation and stick to your plan. If you are overweight equities, reduce the allocation and if you are underweight equities, remember to build exposure in a staggered manner through SIP.

If you are unsure how to go about asset allocation, opt for schemes that can do it for you. If you wish to build exposure to equity and debt, opt for a dynamically managed asset allocation scheme. If you are looking to park your money in equity, debt and gold, you can consider a multi-asset category scheme. The fund manager will then manage the allocation in a manner that the investor can capitalise on the opportunities present across these asset classes.

If you are an investor looking to allocate to an equity fund, it would be optimal to go for a value-oriented scheme. Value was out of favour until September 2020, but once the market recovered from the pandemic-induced correction, it made a strong comeback. Often, in times of uncertainty, value schemes make for a good investment as they focus on investing in sectors that make sense over the long term. The volatile times have opened doors to several value pockets across sectors.

If you are a defensive investor, then you can consider the dividend-yielding category. Dividend yield as a strategy tends to do well in an economic/market recovery phase as value unlocking takes place. At the same time, there is also an economic recovery underway leading to earnings growth for reasonably priced stocks. This leads to such stocks getting rerated, making a win-win scenario for dividend-yielding names.

Another way of playing the defensive theme is investing 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 of the market cycle. This theme houses a variety of sectors including automobiles, pharma, FMCG, consumer durables, retailing and telecom to name a few. With its growing population, consumption demand in India is likely to rise at a steady pace.

From a tactical allocation point of view, exports theme is interesting in light of the depreciating rupee. Indian IT, pharma and automobiles are major exporters to the US and will stand to gain from the strong tailwind the currency provides in the current scenario.

Finally, if you are an investor looking for lump-sum investing opportunities, you can invest in asset allocation schemes. Another approach would be to utilise features such as Booster Sip and Booster STP to stagger your investments and capitalise on market volatility. This feature allows an investor to deploy money based on the changing market environment.

So, if the market valuation rises, the deployed amount would be minimal and as and when market valuation turns attractive, the quantum of funds deployed will be higher. As a result, the investor gets the benefit of both cost and value averaging through this feature. Another alternative is to invest in asset allocation schemes through which one can get access to multiple asset classes within a single fund.

Debt allocation

As the Reserve Bank of India is on the path of normalising rates, investing in floating rate bond funds would be optimal in the short term. This is because of its inherent nature to adjust to rising interest rates and coupons which accrue to investors as the benchmark rates move higher. Since floating-rate securities have a positive correlation with rising interest rates, it provides the much-required cushion to the portfolio.

For an investor considering long-term allocation to debt or for those who are uncertain about where to invest within the debt market, a dynamic bond fund can be a worthy option. A dynamic bond fund seeks to benefit from interest rate volatility by managing the duration. Here, the fund manager can manage duration between one and 10 years, and based on the interest rate scenario, the scheme can also invest in corporate bonds and G-Secs.

To conclude, the road ahead looks uncertain but that does not mean investors should stay on the sidelines. Based on your risk appetite and asset allocation requirements, opt for schemes that will help you make the most of every market situation.

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