In an interview with ETMarkets, Patil said, “While the Indian economy has generated superior GDP growth over the long term, the index is newly outdated as it tracks long-term income growth.” Quotations:
Tell us more about Emerging Opportunities Fund, the new NFO launched to tap into stocks in the mid-cap space?
An Emerging Opportunities Fund is primarily a mid-cap fund with the fund manager having the flexibility to invest in the large-cap or small-cap category based on business cycles, market opportunities and relative valuations.
Although the fund has a mid-cap bias, it has the flexibility to invest up to 30% in small-cap or large-cap stocks.
At various times, we have observed that the large caps have significantly outperformed the small caps, and on the contrary, we believe that the fund is poised to capture opportunities in market prices.
Why NFO now especially when the markets are at a high level?
The data shows us that stock markets tend to make long-term highs on a fairly consistent basis. The index has made more than 25 unique all-time highs in the past 2 decades.
As the Sensex rose from 100 to 60,000 in 43 years, using all-time highs as an investment benchmark has very little practical value. Also, while the Indian economy has generated higher GDP growth over the long term, the index tracks long-term income growth, so the new all-time lag is outdated.
Looking at the mid-cap position, it has underperformed for 2 years of double-digit returns through 2022.
We focus on long-term investment horizons, such as 5 years or more. We have observed that the medium cap category has outperformed other categories in the long term.
For example, as of Oct-22, the mid-cap index has returned 3.6x on a total return basis over the past 10 years compared to 2.6x for the large-cap index and 2.2x for the small-cap index.
The midcap space has several companies that are leaders in their industries and have long runways for growth, available at affordable valuations.
How do you pick stocks for your money? What is the strategy or evaluation method?
Our investment philosophy is fundamental research-based underfunding stock selection with a long-term orientation. We are very cautious on stocks irrespective of sector or market value.
This disciplined and inclusive approach to our investment process has resulted in consistent performance of our funds during bull and bear market phases and delivered good long-term returns to our policies.
This philosophy has helped us so far, with our funds outperforming the index across multiple time frames and staying in the top quartile as seen in morning 5-year and 10-year ratings.
Who should invest in this fund?
Although the Emerging Opportunities Fund is primarily in the mid-cap space and is a fund best suited to investors with high appetite, we believe that even investors with relatively low appetite can have a small allocation in this fund as long as they invest. Long term.
Midcap stocks usually go through relatively high market volatility which can be lost in the long run. The average investor participating in this NFO should be comfortable with gauging market volatility and investing to benefit from long-term compounding returns.
How do you manage risk?
We believe that our rigorous due diligence process on companies minimizes losses due to adverse selection.
Some filters help us refine our investment universe, focusing on positive operating cash, low leverage, high management standards, etc.
In addition, the continuous evaluation of investment companies and the regular revisiting of our investment hypothesis on individual stocks, helps us to correct course and make changes to our portfolios in time.
How should investors play the mid and small cap theme in 2023?
Small caps have underperformed other categories in recent times. With global crude oil prices falling and inflation stabilizing but still at relatively high levels, we believe this could be an opportune time to start building positions in select small-cap stocks.
Our NFO has the ability to seamlessly transition from large cap bias to small cap bias and vice versa to attract such opportunities.
If a person is 30-40 years old then what portfolio allocation should he do for mid and small cap space?
An early stage investor may have a portfolio bias towards mid-cap and small-cap positions. To reiterate, Midcap stocks typically go through relatively high market volatility, tending to outperform over the long term.
A long-term investor should be comfortable investing to average out market volatility and benefit from long-term compounded returns.
(Disclaimer: The advice, suggestions, opinions and views given by the experts are their own. These do not represent the views of The Economic Times)