The Mutual Fund Show: How To Buy The Dips, Stay Diversified In 2023

Nilesh Shah: Today, it will be fair to say that the global situation is fairly troublesome. They had funded revival or growth during Covid time through excessively loose monetary policy and fiscal policy. Now those steroids are being withdrawn and the weakness is visible in the economy. In that overall global context, India is in a relatively in a better position.

We do have chinks in our armour, but compared to the world, we are in the better position. I will give you some data about India. In CY 2022, six out of top ten fastest growing cities in the world are in India: Mumbai, Delhi, Kolkata, Chennai, Hyderabad and Bangalore.

Today we have spent about $120-130 billion for the deficit in FDI outflows and yet we have the fifth largest foreign exchange reserves in the world. Our inflation by and large in 2021 is higher than RBI’s comfort level and yet, for the first time in our history, it is lower than American inflation for more than a year.

So, the relative basis the Indian economy is doing well. The world situation is fairly green, and clearly, we have a challenging time ahead.

Feroze Azeez: The retail investor needs to respect all the risks, not just get carried away with one risk because some of those risks are optically visible. Some of them are camouflaged risks, especially when we speak of inflation so much over the last six-eight months globally.

From a global context perspective and Indian context perspective and having large amounts of debt or debt-related instruments, which is what we are, the third largest economy from a household savings standpoint but when you look at the savings, are they being as productive as they could be over the last couple of decades. If you reflect that's where we have gone wrong. We have gone right in the extent of saving. We have not transformed those savings into the right investments. I think that's one thing we should correct in the subsequent years. That's what a retail investor should think of.

The second thing is to think of is going forward that he should not look at the rear-view mirror as much. If you look at the last four or five instances of people buying performance. They have gone wrong in 2020, be the NASDAQs of the world, be those Cryptos, be those stocks, you name it, you will see that people have the tendency of buying past performance. That's one key learning we take back from 2022.

Now coming to looking forward, I think all four assets which are there, are relevant to each individual at a point in time, not falling in love with one of them is the key investor attribute we should aspire for. Like, I meet several people in the marketplace, somebody who has fallen in love with the FD, he will be with the FD for all his life. If somebody's fallen into real estate, irrespective of what the cycle is, they will stay with the course. So, these four assets all have some importance in this year. Unlike most of the past years.

All four could have some weightages is the first point, and equity of course from an Indian standpoint, would be the key asset class to build for the retail investors and they are doing a great job. Let's not take away the credit, the SIP numbers moving from 11,900 in April to some 13,500 is a great representation of an informed retail investor during the most volatile times. 

Nilesh Shah: One, our equity markets are discounting most of the positives which are visible today. That means we are like Surya Kumar Yadav, when we go to bat, people expect you to hit fours and sixes, people expect you to score a century. So please remember that in 2023, India will have to deliver on the higher expectations.

Number two, globally there are many events which will hit India or shape India; Russia-Ukraine situation, Fed pivot, OPEC cartelisation influencing energy prices. These are all the global factors which will continue to weigh on Indian economy as well as market.  If these factors come favourably, we will do well. If they don't come through favourably, we will invariably have to have some corrections.

The third and the most important thing which matters for us is the longer-term horizon. The equity market is like a test match. You don't come here to play 20 overs. You come here to play 200 overs. 2023 like 2022 will be a difficult year to make money because positives are priced in and there are so many events waiting to happen.

In this kind of scenario, it is more of a buy the dip market. Use correction to increase your weightage to equity as an asset class, be a long-term investor and have moderate return expectation. This will come handy for investors as they navigate choppy waters of 2023.

Feroze Azeez: There are different kinds of people, and no one size fits all. That's what personal finance is, ‘personal’ word that emphasises a very customised kind of situation which we all experience. Now let me just pull one word from what Nilesh sir was saying, expect moderate returns, I think, if you are a new investor, the first thing is to understand the asset class you are dealing with. So, you see that you have moderate expectations.

People have very, very steep expectations with equity. They have very, very relaxed expectations from real estate, for example. I met a gentleman who says, I like to see my statement on the third of every month on the financial side. I said when the last time was you calculated the IRR of your second home. He said I have got it 22 years back I have never calculated the IRR.  But the same human being wants to see the financial assets portfolio IRR on a monthly basis not later than third. This behaviour of finance aspect of putting one of them under tremendous pressure. You want equity to come from class one to class 10 as a child in two years, real estate gets 10 years to become a 10-standard student. So don't put too much pressure on one asset.

Second is, before you begin always remember, when you are cutting the cheque into equity, that equity markets average has fallen 20% from peak to trough every single year. Even if you remove the two exaggerated years of 2008 and 2020, 14.3 point is the fall from peak to trough. So don't go looking for reasons why the market will fall, the market will find their reasons, you will have to decide what you wish to do when that happens rather than just go around trying to find out the reason.

This is just some foundation piece of advice because you said it's a beginner. if it's a beginner I would assume that he or she is under 30 or under 35 atleast and I would say at 80-20, 80 to equity 20 into debt, assuming that you have enough gold in your lockers and you have real estate which are large ticket items. Only that portion at 80-20 can give you a 11-12% kind of post-tax return in the current regime. But both these financial assets are very, very lucrative. Debt is giving you 6.5% post tax lending to central government. You are getting 13-14% in active funds is possible.

Nilesh Shah: Today, globally, many people believe that the Fed will keep rates higher for longer. Many people believe that the Fed will have no option but to lower the interest rate as the debt burden will kind of squeeze out the economy.

I am in the camp that the Fed will not be able to keep rates higher for longer because the debt servicing of the American economy, American consumer and American corporate will go for a toss if the Fed continues to keep higher interest rates. Keeping that in the background, today market consensus is that by March-April 2023, Fed will reach its peak interest rates at about five quarters and by September-October 2023, they will start cutting interest rates.

RBI will obviously follow the Fed. They will raise smaller steps of interest rates on the way up. Then cut interest rates much later, but they will be following the Fed in setting India's monetary policy.

Now, from an investor’s point of view, my recommendation will be to wait for the budget. We will see the borrowing programme. Last year banking liquidity was around Rs 8 lakh crore, and the borrowing programme came at about Rs 11.5 lakh crore. This year banking liquidity is about Rs 2 lakh crore and if the borrowing programme comes up to 13.5 lakh crore, I don't think markets will have an appetite for this borrowing programme and there is possibility that yields may back up a little higher.

Post budget, when yields are, let's say, 7.5% and above, that will be the time to lock duration, that will be the time to go for longer duration. Now, many people say you know, we really won't have time to manage all these things, fair enough, then you can invest in a dynamic bond fund, where the fund manager can manage duration looking at the interest rates movement. I think the time to invest in debt, especially longer duration will be post budget.

Feroze Azeez: Point one, I think home buying is more of an emotional aspect for the first home you are going to live in. So, I also personally think that that's a great utility of money because it brings you calmness in life. It brings you more joy, you can do what you wish to do with your home, which you can't do with a rented house. So, I think home buying is not a bad idea.

Coming to your point of interest rate movements upwards, I think till date people can borrow at 8-8.25% on a home loan basis. You are speaking about the government of India borrowing 10-years at 7.3-7.4% and there are some MNC banks are ready to lend a home loan at 7.75% and even at 7.1%. So, if you are with an individual credit risk, you are speaking of borrowing at very similar rates that are marginally higher than the government of India. So that kind of policy rates have not been passed on to the client.

Point two, I think policy rates take a lot of attention of both the investor and the borrower and I think investors never make money or lose money on policy rates. They make or lose money on 10-year yields, or 5-year yields of bonds and the spreads which the corporate bonds command over the G-sec paper now, so the point to I am trying to get to, today is still a good time to buy a home, provided it comes in your budget.

There are four or five other ratios which are very critical when you buy a home. You have to look at your EMI to your disposable income ratio. You have to look at your portfolio to your EMI ratio. If you look at those three, four ratios, have a thumb rule that you are not going overboard. The more important decision is not going to be whether you are going to be charged 0.25% average more during the life of the loan than what time are you qualified to buy a home today. Don't stretch too much.

Feroze Azeez: One very important thing is down payment, if the down payment of your house is greater than 50% of your current portfolio, I would say no, you please accumulate more assets.

Sometimes what happens is people give a down payment of Rs 30 lakh, but their portfolio was Rs 35 lakh. That's not right, at least maximum you can give a down payment of half your portfolio size and point two, your EMI for home loans should not exceed 40% of your post tax salary credit.

These are, of course these are very broad, but at least instigating a thought to the viewer.

Nilesh Shah: My expectations will be that India should give a fiscal roadmap towards consolidation. Thanks to Covid, we had to keep FRBM in abeyance, but we should not abandon it. That means we have to give a roadmap to reduce our deficit.

Now the deficit can be reduced in two ways. One, raise resources or cut spending. In today's environment, I don't think it will be wise to cut spending. Yes, of course, if we can maximise the output from limited spending that will be always better. Increase the efficiency of spending by removing wastages, by removing leakages. But we must continue to spend so that the economic momentum continues.

The option is to raise resources. Now one could raise tax revenue, or one could raise non-tax revenue. On the taxation side, we have to plug the loopholes. They have to ensure that some of the loopholes which are available are plugged so that the burden of taxation gets distributed equally over all the citizens.

There are a couple of avenues which the government should consider for raising resources. Between 2017 to 2021, 9,30,000 Indians have surrendered their citizenship. If they are taking away, probably, let's say $250,000, over a period of time, that's an outflow of $250 billion. We must ensure that this outflow is discouraged by levying an exit tax when an Indian citizen surrenders their citizenship, they have to pay an exit tax. The United States of America levies exit tax and so do many other developed countries. Levying exit tax will one raise resources for the government. Second, it will discourage capital outflows. So that's one way to manage it.

The second thing, my recommendation will be gold disclosures scheme. In 21 years of this century, we have imported close to $373 billion worth of gold on a net basis. We all know gold smuggling is flourishing in India, thanks to about 15-16% import duty difference. If we add gold smuggling, then this number could be as high as $500 billion. But this capital is locked in bank lockers it is not there in white economy. By structuring a gold disclosure scheme, the government will raise revenue. It will also free up capital which can then go and invest in a white economy.

So, you have to raise resources through non-tax manner, which allows you to fund your spending on infrastructure and which encourages growth, at the same time, keeps fiscal discipline. If you can achieve this impossible trinity of raising resources, spending money and maintaining fiscal discipline, I think the budget will be a watershed budget.