Given the inherently higher concentration in thematic strategies, these risks can translate into elevated volatility. Vinit Sambre, head, Equities, DSP Mutual Fund, tells Saikat Neogi that in case the sector appears to be in a peaking phase—both in terms of business performance and valuation—despite a strong prevailing narrative, it is prudent to exercise caution and avoid chasing momentum. Excerpts:
Even as SIP inflows reached a record high in April, why did the SIP stoppage ratio surge?
Markets have become volatile, and after strong gains over the past few years, equity returns have moderated. In this environment, it is natural for investors, especially the new ones to feel anxious, which may lead to some fluctuations in SIP inflows. However, despite the current volatility, overall equity inflows and SIP contributions remain healthy. Some level of redemptions is to be expected — either from investors who have achieved their financial goals or from newer investors who are uncomfortable with the recent volatility and returns.
Given the rally in thematic funds, should individual investors be cautious now?
Concentrated or thematic exposures should be approached with careful due diligence. The evolving geopolitical environment can lead to abrupt and unforeseen disruptions that disproportionately impact specific sectors. Even themes that appear structurally sound may encounter near-term headwinds due to factors such as regulatory shifts, commodity price volatility, or geopolitical developments. Given the inherently higher concentration in thematic strategies, these risks can translate into elevated volatility. Therefore, investors should assess where the sector stands in its business and valuation cycle. If the sector is in a cyclical low, offering reasonable margin of safety in valuations, it may present a compelling opportunity. However, if the sector appears to be in a peaking phase—both in terms of business performance and valuation—despite a strong prevailing narrative, it is prudent to exercise caution and avoid chasing momentum.
What kind of a core-satellite approach should an individual investor adopt now to get higher risk-adjusted returns?
In the current environment, it is prudent for investors to exercise caution and adopt a more diversified investment approach across asset classes. Elevated uncertainty — stemming from both global and domestic factors — is likely to keep equity markets volatile in the near term. Moreover, the recent market rally has pushed valuations higher, leaving little margin of safety. In this backdrop investors should also maintain a long-term orientation, as staying invested through cycles can help offset valuation-related concerns over time. Importantly, those with a prudent asset allocation strategy should avoid reacting to short-term market movements and remain committed to their long-term goals.
Should investors now take a staggered approach to invest in select mid- and small-caps?
The more critical factor in equity investing is the time horizon an investor is willing to commit. For truly long-term investors—those with a horizon of 7–8 years or more—whether the investment is made as a lump sum or staggered over the next 5–6 months is unlikely to significantly impact outcomes.
The current concern around elevated valuations tends to get addressed naturally over time as earnings growth catches up. While staggering investments may be a prudent approach in the short term given the prevailing market volatility, it is important to note that for long-term investors, the mode of entry matters far less than staying invested with discipline and patience.
What are the pockets of opportunities that investors can find now to invest for a long time?
In the current environment of heightened uncertainty, it is prudent to consider investing in diversified schemes. Additionally, investors should aim to maintain their asset allocation in line with their risk profile and long-term objectives, rather than making frequent adjustments based on short-term market movements.
While volatility may persist in the near term, long-term investors would do well to view such periods as opportunities to gradually increase their exposure. Importantly, one should avoid compromising on quality while deploying capital.
As earnings growth normalises to a more sustainable range of 12–13% going forward, the market is likely to reward fundamentally strong, high-quality businesses more consistently.