As markets near record highs, investors are confused over how they should structure their portfolios. Bhavesh Sanghvi, chief executive officer of Emkay Wealth Management, shares his views on how investors could go about allocating money at this juncture.

The market is at an all-time high and valuations appear rich. What could be a good asset allocation mix now?
Three things can be contemplated at this time. One, book some profits on positions where the target rate of returns is reached, or two, look for something that is relatively cheaper to buy, or three, be patient to wait for a corrective downward movement in the market to make some fresh purchases. It is also possible to make fresh investments in a phased manner. A good asset allocation will clearly be defined based on time horizon and your risk appetite. For a full-blown equity portfolio, I would go with 50% large caps, 15% global funds, 25% mid-caps & 10% small caps.

What is your advice on equity exposure? How much should be their exposure to mid and small caps?
There is an absolute exposure and relative exposure when it comes to Equity Market caps. The absolute exposure is that portion of the equity exposure or that minimum exposure that one may keep in large caps or mid-caps or small caps at any point in time irrespective of what is happening to the particular segment. Usually, a 50-60 % exposure to large caps, a 20-30% exposure to mid-caps and a 10% exposure to small caps is what we see in most of the portfolios. The texture of the results over the short term clearly favour mid and small caps. Herein lies the challenge, we have to expand the results over the long run, let’s say five years, then the colour changes quickly. The risk versus return trade off over the last five years is clearly in favour of large caps. Historically over much longer terms, in the Indian context, it’s the companies in the mid cap category that have created enormous wealth.

When it comes to relative exposure, it means that one may enhance the exposure to midcaps or small caps by reducing the exposure to any other segment to the tune of 10-20 %. Needless to say that this segment has seen a decent outperformance If you look at this in another way, we call it relative premium or discount to the large cap index. An equity allocation of 50:40:10 is a good pattern for those who are looking for aggressive growth from the portfolios over the next five years. However, the management of the small cap exposure in a dynamic way needs to be achieved, for the portfolio to do well consistently.

For investors, who are not keen to put money in traditional fixed income instruments at the moment, what are the options?
There is disenchantment with lower interest rates prevailing today. Rates may start rising as economic growth picks up, and interest rates and yields also surge higher. So, at this point in time it is advisable to stay at the short end of the curve and the yields and returns will be quite low for the time being.

I still prefer PPF as a route to lock my long-term fixed income requirement. Its illiquid so one needs to plan better. There are very interesting Category II AIFs (Alternative Investment Fund) in the space which offer good post tax returns ranging around 7%. Listed MLDs (Market Linked Debentures) also offer a good post tax return. REITs and INVITs also offer decent yields but they come with no capital protection as the pricing is market determined.
There are a couple of avenues, if you wish to avoid fixed income altogether. These are arbitrage funds for short term parking of funds.

You are a big believer in international investing. Where should investors put money? How much should this be a part of the assets?
International investing is crucial for portfolio diversification. There are wonderful, matured & large business with an established earnings track record available globally. These companies cater to customers all over the world. Very few Indian business have such a long-term track record.

There are so many attractive themes around which a number of international funds are set up. These include climate change, consumption, emerging markets, technology, digitization, media and entertainment, water etc. Some of these themes may work out quite well in the coming few years. A 10-20% of your overall equity allocation must be made in these global funds. I like PGIM Global, Axis Global Innovation and Franklin US Opportunities.

One needs to take cognizance of the fact that these funds too present currency risk. Therefore, while investing in a global fund the expected returns from the fund in comparison to the local Rupee funds is a factor to reckon with. You also need to evaluate the post-tax return as the funds are categorised as debt funds in India.

Zomato’s listing has been a success. There is a big pipeline of IPOs from new age businesses. How should investors go about investing there?
There is no harm in investing into IPOs, but preference should be given to investing into companies that have an established track record, established business model and leadership positions. While investing into IPOs one needs to look at certain parameters very closely- the rate of growth of the business and the sector, the opportunities for scaling up, the stage of growth in which the business is currently, and the depth of customer franchise which the business has, before committing on a Long-Term Investment in the IPO. If one goes by data, approximately 55,000 startups have attracted investments from seed investors and only 55 have turned into unicorns. That’s just a 1% success rate. It’s an exciting area but it’s practically challenging to find so many ideas and remain invested. I personally prefer these global funds which are investing in such businesses all over the world.

You have been a wealth advisor and investor for over two decades. What is the one aspect that is a must to create wealth consistently?
For wealth creation, there are three fundamental principles that one needs to observe: stay invested all the time and invest regularly, be patient with the investments made as it takes time for it to bear fruits. It is also important that the investment portfolio is reviewed from time to time for any course corrections if required.

Published in Economic Times