‘We are bullish on Indian equities but expect volatility to increase’ | Mint

‘We are bullish on Indian equities but expect volatility to increase’

Nimesh Chandan, chief investment officer, Bajaj Finserv Mutual Fund.
Nimesh Chandan, chief investment officer, Bajaj Finserv Mutual Fund.

Summary

  • The Bajaj Finserv Balanced Advantage Fund is an all-seasons product, which suits a large population of investors, Chandan tells Mint

MUMBAI : Asset allocation in equities should reflect the changes in market conditions. Unfortunately, a lot of investors have misinterpreted this as selling when the market goes up and buying when the market goes down," says Nimesh Chandan, chief investment officer, Bajaj Finserv Mutual Fund. The asset management firm was in the news recently for launching a balanced advantage fund (BAF), a type of hybrid mutual fund that invests in a mix of equity and debt securities. The Bajaj Finserv Balanced Advantage Fund is an all-seasons product, which suits a large population of investors, Chandan tells Mint. Edited excerpts from an interview:

Why have you decided to go ahead with a BAF?

A dynamic asset allocation model for a conservative investor has been recommended now for many decades. It was first formally suggested in a book by Benjamin Graham in 1949, when he said that investors should move allocation to equity between 25% and 75% of the portfolio based on market conditions. So, this is really an all-seasons product, which suits a large population of investors. If we come to why we chose to launch it particularly in this period, that’s because we need opportunity both in equity as well as fixed income side. Indian economy is showing robust growth and corporate sector is delivering good numbers. However, there are political and geo-political events that may cause volatility. A balanced advantage fund will use this volatility to generate returns for our investors. On the fixed income side, we believe we are at the peak of interest rates. These are attractive levels to lock-in a good potential yield and seek to enjoy the benefits when the cycle starts turning downwards.

How are you going to allocate between debt and equity?

Asset allocation in equities should change with change in market conditions. Unfortunately, a lot of investors misinterpreted this as selling when the market goes up and buying when the market goes down. This has an implied assumption that the crowd is always wrong. We believe the crowd is right on trends but wrong at ends. The crowd is not always wrong but it tends to overreact with emotions and cause market extremes. So, ideal strategy is to sell when market has overreacted with greed and buy when the market has overreacted with fear. Hence when we created our balanced advantage asset allocation model, we used fundamental factors as well as behavioural factors that influence the market to determine which part of the cycle we are in. This helps us make better allocation decision.

What’s your philosophy of choosing stocks?

We define our investment philosophy as INQUBE. It stands for the three sources of alpha generation—information edge, quantitative edge and behavioural edge. We use tools that have the potential to provide these three for long-term investment success. The stock selection process involves top down as well as bottom-up screening to identify strong business models with good management teams. For the BAF, the portfolio would be dominated by large-cap companies. Typically, mid-caps and small-caps add to the volatility, which we would like to avoid. A large-cap portfolio will also improve our accuracy while hedging.

What about debt?

In the fixed income side too, we follow the same INQUBE philosophy. As a house, we believe in giving priority to safety over returns. In this fund, the fixed income part will have good quality low credit risk securities. We find ourselves at an opportune time at the launch to pick up assets with good credit ratings as well as prevailing healthy yields.

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Who should go for this BAF?

Through the BAF, one is taking professional expertise on asset allocation between equity and fixed income. Typically, these funds have lower volatility than the equity index and opportunity for long term compounding. So it is an all-seasons fund suitable for many investors who have these financial goals. However, a conservative investor with a long term investment horizon will find our fund a useful addition to the investment portfolio.

There are already 25 funds in the BAF category? Why should anyone choose Bajaj Finserv over others?

We use not only fundamental analysis but also behavioural analysis for determining the asset allocation between equity and fixed income. Crowd psychology or behaviour is an important determinant of market movement. We have studied across many markets and different timelines to understand how the crowd expresses its sentiment, expectations, and perceptions. Like a smart tailor stitches together more than 30 parts and 3-4 different fabrics to ultimately made a two-piece suit, a jacket and a trouser, in the same way we take many indicators to stitch together two pieces, a fundamental value, and a behavioural indicator. These two pieces provide us with a suitable allocation in any market condition.

What will be your strategy considering current market conditions?

We are bullish on Indian equities for the long term. Currently, large cap companies are available at attractive valuations. However, we do expect a volatile time considering the global political and geo-political set up. On the fixed income side, we believe this is a good time to lock in good prevailing yields. Over the medium term, we could also see benefit of capital gains as interest rates turn downwards. We are hence launching a balance advantage fund which has the potential to benefit from the current market conditions.

How is the fund management team positioned?

Currently we are a 15-member strong investment team. This includes fixed income and equity. For our BAF, we have Sorbh Gupta, who is a senior fund manager for equities, and Siddharth Chaudhary, senior fund manager for fixed income. Each of our fund managers are supported by a strong research team as well as quantitative and behavioural investment tools.

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