Inflows to systematic investment plans (SIPs) touched a record high of Rs 20,371 crore in April, the tenth consecutive month where inflows surpassed Rs 15,000 crore, reflecting sustained investors’ interest. Rajeev Thakkar, chief investment officer, PPFAS Mutual Fund, in an interview to Saikat Neogi, says retail investors should increase the SIP amounts over years in line with inflation and higher income.

Investing through SIPs has gained a lot of momentum. What should investors keep in mind to get higher returns over a longer period of time?

The key mistake that investors make is that SIPs are started in bull markets and tend to get stopped when markets fall. SIP stands for systematic investment plan and it is important to be systematic and disciplined. Further the SIP amounts should increase over years in line with inflation and higher income. Typically investors should increase their SIP amounts by 8% to 12% every year.

What kind of asset allocation strategy should an individual investor look for higher long-term returns?

Asset allocation should be driven by the investors’ circumstances like age, current financial position, goals and risk tolerance rather than the market outlook. To get a higher return, investors should not have excessive allocation to very short term fixed income securities if the investment duration is longer term. For 5-year plus investments, investors can look at equity investments and for medium-term investment horizons, investors can look at investing in hybrid funds.

As valuations in small and mid-cap stocks have become elevated, should investors reduce allocation in them and increase it in large-cap stocks/funds?

My recommendation is to choose a diversified mutual fund rather than trying to time the shifts between large, mid and small cap funds. Another alternative is to decide the weightage to the three segments and keep investing in all the three segments in a disciplined manner. In the current time however, the small cap space is looking overheated and one should look to reduce exposure especially if the funds are needed in the short or medium term. Investors with a five-year-plus investment horizon can continue to hold on as per their asset allocation.

What are the pockets of opportunities that investors can find now to invest?

Private sector banking stocks in general have delivered very poor returns in the past four to five years while the profit growth has been robust. They have maintained good asset quality and the financials are looking good. Selectively one could also look at PSU and utility kind of stocks. However in the PSU and utility space, one has to be careful as some stocks have rallied very significantly and the valuations are not in sync with the fundamentals.

How can value investing help to fight market volatility?

Value investing is all about margin of safety and trying to buy securities at a discount to intrinsic value. By practising this in a disciplined manner, an investor can avoid permanent loss of capital. Permanent loss of capital is where a substantial portion of the amount invested is lost. This can be because of business reasons; for example, the company goes bankrupt or it can be on account of buying at very excessive valuations. A permanent loss of capital is to be distinguished from a quotational loss. Equity markets and prices tend to move around a lot and it is quite likely that an investor will see share prices decline after a purchase and it is quite normal. There is almost a 50% chance each of a share price increase and a share price decrease immediately after a purchase.

Value investing does not directly protect against market volatility but when value investing is done in a disciplined manner in good businesses run by above-average promoters and managers, the volatility of such a portfolio tends to be lower than the market volatility.

How should Indian investors look at investing in foreign equity through mutual funds to diversify their portfolios?

Given some recent developments, the ability of mutual funds to offer geographic diversification to investors is a bit hampered. The first development relates to the overall limit of $ 7billion which the mutual funds have to adhere to while investing abroad. This limit was reached in February of 2022 and since then mutual funds have not been able to invest meaningfully in overseas equities.

Furthermore, the tax law changes effective from April 1, 2023 have removed the long term capital gains tax benefits for mutual funds with less than 35% exposure to Indian stocks. This has made funds only investing in foreign equity unattractive. Investors should wait for the investment limit of $7 billion to increase and then invest in funds which invest in India as well as overseas stocks to retain the tax benefits.