In conversation with Viraj Kulkarni, Vice President, Equity, Bandhan AMC Limited

“Discipline and temperament go a long way in creating long term wealth”, Viraj Kulkarni, Vice President, Equity, Bandhan AMC Limited

With the uncertainty around a trade war affecting the global economy, what should investors do with their money or investment portfolios?

Discipline and temperament go a long way in creating long term wealth. Investors should remember that: in bull markets trees don’t grow to the sky and in bear markets things rarely go to zero. Having an asset allocation framework and sticking to it at all times helps investors build wealth in a disciplined fashion. As equity markets, especially Small & Midcaps (SMIDs) have done well over last few years, investor allocation to both equity and SMIDs have gone up significantly. Currently, the total AUM in Small + Mid Cap Mutual Funds is higher than Flexi + Large Cap. Investors should use the current correction as an opportunity to review their portfolios and rebalance their portfolio back to longer term asset allocation targets.

How often do you rebalance the portfolio, and what triggers an asset allocation change?

As a fund manager, portfolio rebalancing is a continuous process, as there are regulatory requirements wrt asset allocation. Also, our Multi Asset Allocation Fund follows a fixed asset allocation with allocations reflecting longer term return potential of each asset class.

Markets have become very nimble with cycles become shorter over the years - a 6 month delay in rebalancing may mean a significant difference in returns. As a result, investors should review their portfolio every 3-6 months, though frequent rebalancing may not be very prudent. Movement of more than 5 per cent from target allocation range can trigger a rebalancing. Asset allocation is the discipline investors should follow for longer term wealth generation. As a result, change in target asset allocation should be a very rare event.

What is your outlook on the Indian fixed-income market, and how should investors think about debt allocation in uncertain times like the recent one.?

Fixed income offers relative stability to investor portfolios in good times and bad. With low inflation, falling fiscal deficit and steady external account, Indian fixed income market has become very attractive for domestic and global investors. With inflation of around 4 per cent, 10-Year yield of 6.5-7 per cent results could provide a real return of 2.5-3 per cent with minimal risk. Due to the changes in the recent budget, effective tax rate for income upto 25 lakhs is around 12.5 per cent and for income upto 50 lakhs is around 20 per cent. This has made fixed income very attractive as a part of investor's longer term asset allocation.

How do you manage bond duration when interest rates go up or down? Please tell us what the bond duration is in debt investment.

Bonds are 10 per cent part of the Fund. The bond part of the portfolio is managed like a dynamic bond fund with a longer term view in mind. Current duration is around 8.3 in line with a view of declining interest rates.

How do you view India’s macro trends, growth, inflation, and interest rates, and what do they mean for investors?

Indian macros have improved quite significantly over the last few years where stress indicators like Current Account Deficit, Fiscal Deficit, inflation etc have been benign; corporate and bank balance sheets are robust.  Growth is always cyclical in nature and highly linked to global growth. So, some years GDP will grow closer to 6 per cent and some years closer to 7 per cent, which is all a part of the cycle. The robust macros along with a steady growth rate lends a lot of stability for investors investing across asset classes as it significantly reduces risk of accidents.

Investors just have to be wary of chasing high return expectations as these can result in valuation bubbles and accidents. With inflation structurally coming down from 7-8 per cent to 4-5 per cent, nominal GDP growth will come down from 14-15 per cent to 11-12 per cent. Real GDP growth is same in both cases. Over the long term, earnings and stock returns mirror nominal GDP growth. Investors should remember, in real terms, returns of 12 per cent with inflation of 4-5 per cent are the same as 15 per cent return with inflation of 7-8 per cent.

How does the arbitrage component help manage risk and enhance returns in a multi-asset strategy?

Arbitrage can generate very steady type returns across cycles. The arbitrage component of the Fund serves dual objectives of ensuring equity taxation (50 per cent active Equity + 15 per cent Arbitrage) and also provides relatively stable returns

How do you manage downside risks across different asset classes simultaneously?

Historically, very rarely all asset classes have had a significant downside simultaneously. Even in the last 12 months, when Indian equity was correcting, global stocks did well and when global equity has been correcting, Indian stocks have performed quite well. Gold has been an outperformer throughout and it generally has negative correlation with equity. Also, investing is about managing risk and probability. There is always a chance that Gold, Domestic Equity and Global Equity can correct significantly together but the probability of such an event is low.

For international exposure, do you prefer broad indices or specific themes? What should investors focus on?

Idea is to stick to one's area of expertise. Since our area of expertise on international stocks is low, we prefer to stick to broader indices

In the current market, is it better to be aggressive or stick to a defensive strategy for allocation in equity investing?

Large Cap valuations are fair to marginally above historical averages whereas SMID valuations are still above historical averages. As a result, this is not the time to be aggressively deploying in equity. Also, it is not the time to be aggressively selling Equity, especially Large Caps. Investors should stick to their asset allocation. If the recent correction has brought the equity component lower, investors can allocate to equity in a staggered fashion and vice versa.

How much should one save if he earns, for example, Rs 100 monthly?

Everyone has different needs and goals so the answer for each individual would be different. Investors are people who also have near term aspirations and needs. Ideally, one should balance investment and consumption. Excess of one over the other isn't very healthy. But 20-30 per cent of income saved every month is a good start.