Equity markets will be volatile for next 2-3 yrs: Nimesh Shah

Written by Mithun Dasgupta | Updated: Jan 2 2014, 18:19pm hrs
Indian stock marketsEquity markets, to my mind, are going to remain volatile for the next two-three years. I don?t see a single direction movement in the equity markets: Nimesh Shah (Reuters)
Investors should not shy away from market volatility and try to learn how to benefit from it, feels Nimesh Shah, MD & CEO, ICICI Prudential AMC. In an interview with Mithun Dasgupta, he says it is good to diversify with investment in US stocks as well. Excerpts:

Globally, a few major events are imminent in 2014. The US Federal Reserve will begin tapering of its stimulus programme from January and the general elections at home are a few months away. So, do you expect market volatility to increase going forward

See, mutual fund is a derivative product, the base product is equity. Equity markets, to my mind, are going to remain volatile for the next two-three years. I dont see a single direction movement in the equity markets. I believe markets will remain volatile, even if they go up, they will with volatility. That is what my view is. So, we are a firm believer in volatility.

Amid such volatility, how do you see retail investors gaining from investments in mutual funds

Especially for the retail investors, it is very difficult to time the market entry. But we should not run away from volatility, it is here to stay. We should see how do we make the market volatility our friend and how do we benefit from it. So we have created a series of funds, which gain out of volatility.

How do these funds gain from market volatility

When you look at ICICI Prudential Dynamic fund or Balanced Advantage Fund, these funds gain out of volatility. Whenever the markets go up, they (these funds) sell equities and buy debts, and whenever the markets go down, they buy equity. So, asset allocations in these funds are not constant. We have derived this price-to-book ratio. At various price-to-book ratios, when the ratio in the markets goes very high, we go out and sell equities and convert into debts. And when the ratio goes down in the markets, then we invest in equities. In this process, the customers always get an advantage of lower prices in buying. This model has worked beautifully well for us. Our Dynamic fund has given almost 26% returns in the last 10 years vis--vis 19-20% given by the markets.

You also have a US-focused equity fund. How is the fund performing

We introduced the fund in July, 2012. In the last 15 months, cumulatively it has given about 15% return with a CAGR of close to 45%. So, it is doing well.

But now in the face of imminent tapering, do you expect US-focused funds to still be attractive for Indian investors

An Indian investor should also invest something in US stocks for diversification. Why I am saying that Because it will give him a natural currency hedge. A lot of our cost of living goes up and goes down because of the change in dollar rate.

Our analysis is that more than 30% of our cost of living changes because the dollar rate also changes. So, if that is the case, then investing in US stocks is not only about investing in US business, it is also about getting a dollar hedge. So, by investing in a US-focused fund, a customer sitting in India gets diversification of currency and diversification of businesses. One should consider it as a diversification strategy and not bother about QE tapering. In the next five years, US should do well.