ETFs will become popular among retail investors in India

The credit risk issue is considerably palpable too. The corporate credit profile in India at the moment is subject of debate, and many questions emerge from the corporate sector's perceived ability to pay its lenders. A number of defaults have happened in the recent past, and discerning investors are well aware of it

The Indian market is currently witnessing a shift of sorts, thanks to newer and smarter alternatives that are arising in various ways. Alternative Investment Funds (AIFs) for instance are a way forward for many high net worth investors, and indeed the market is bracing for bigger pools of AIF capital

The pandemic seems to have changed the entire dynamics of the market. How can one protect one's assets in the current situation?

The last ten months or so, beginning March 2020, have been extraordinarily eventful for investors, thanks to the onslaught of Covid-19, which decimated the markets, to the speedy rise in the indices, culminating in all-time highs for the leading benchmarks. The average investor, caught between the two extremes, is currently facing a quandary, marked by abrasive questions, many of which pertain to risk assessment, asset allocation and portfolio construction. The posers of the day, therefore, range from the rudimentary "How can I protect my assets?" to the complex "Where should I invest in?" Answering them is a steep challenge, and no single answer can address all the requirements enumerated by investors, each of whom is a unique individual with specific needs and objectives. There are, therefore, more answers than one to your questions.

Ok. Let's take them one by one. Let's talk about diversification first. How should one attain diversification in the current market?

The average equity investor must ensure adequate diversification in favour of both old and new. In other words, he must allocate substantial portions of his investible surplus to the so-called conservative companies and to the millennial players. The former, many with formidable legacies, have buttressed portfolios for years, and indeed decades. The largest of the large caps today are included in this bracket. They cut across industries; however, one can easily identify heavyweights from among infrastructure players or commodity companies.

Which are the sectors you have at the back of your mind?

Some of the sectors that I have in mind are cement, steel, power and oil. It is not appropriate for me to name any specific company at this stage, but readers will easily identify storied players in a range of industries. Many of these have enjoy revenue/profit visibility, while others have gained from large nation-wide footprints, especially from their impressive distribution networks.

The so-called millennial sectors are the ones that are believed to appeal to the digitally enabled sections of the investing populace. A number of areas among them are biotechnology, pharmaceuticals, food and entertainment have lately thrown up smart enterprises. Some of these have already gained substantially in terms of venture capital investment, while others are waiting to receive funds from large overseas investors.

The point is the smart investor must employ a mix of the old and the new to devise an efficient portfolio. It is not enough indeed a bit too simplistic to allocate one's money on the basis of large-, mid- and small-cap stocks. Market capitalisation is an imperfect indicator, and usually makes for a weak rationale when it comes to portfolio construction.

How should you analyse the new categories of risks?

Newer classes of risk may well emerge in the days to come just like the ones spawned by Covid-19, which raged across markets to unleash utter destruction of valuations in the initial days. Now, in the times to come, a recurrence of the deadly disease (may be in a different form) cannot be ruled out, and investors (in both debt and equity) must remain forever vigilant on this front.

Investors, especially debt investors, may also brace for difficulty on the credit and interest rate fronts. At any rate, retail inflation is scaling up in India and our banking regulator is fighting a tough battle when it comes to inflation control. Consumer Price Index, incidentally, is more than 7 per cent as of date.

What about credit risk?

As for credit risk, the issue is considerably palpable too. The corporate credit profile in India at the moment is subject of debate, and many questions emerge from the corporate sector's perceived ability to pay its lenders. A number of defaults have happened in the recent past, and discerning investors are well aware of the fault lines.

Debt investors in particular are being advised to exercise great caution in choosing debt securities for their portfolios. Credit ratings, I must add, need to be analysed in great detail before investment decisions are taken. Conservative investors need to adhere to Triple-A rated (or equivalent) securities when they set out to construct their portfolios.

What new options have emerged for you?

The Indian market is currently witnessing a shift of sorts, thanks to newer and smarter alternatives that are arising in various ways. Alternative Investment Funds (AIFs) for instance are a way forward for many high net worth investors, and indeed the market is bracing for bigger pools of AIF capital. I am happy to note that the securities regulator has already framed benign regulations for such asset classes.

Among the other options that are set to travel far is index-based investing, thanks mainly to rising awareness of passive investing. The latter can be achieved by means of index funds, especially Exchange Traded Funds. ETFs are used globally by very large institutional players, and in India, the concept of ETFs is still nascent. It will soon gain greater popularity, and even retail investors will consider it for their own portfolios, I am sure.

How are things shaping up for retail investors with regard to Mutual Funds?

The present scenario for retail investors is marked by many varieties of mutual funds, and the discerning participant must exercise choice very carefully. Mutual funds offer instant diversification at competitive costs; they are also a very convenient tool for small investors. I expect a greater variety of funds to appear on the horizon in the near future.

In the days ahead, the average investor will be inundated with investment products, many of which will be offered by his neighborhood bank. The latter will probably take the shape of a mobile app, and traditional styles of brick-and-mortar banking seem to be over. The modern bank will be a digitalization-driven outfit, empowered by smart technology, appealing to the psyche of the millennial consumer. And, well, that is another story that should merit a commentator's attention.