'Small cap, midcap & banking funds are attractive bets'

As the equity market continues to touch record levels, Manish Gunwani, CIO-Equity Investments, Nippon India Mutual Fund, believes that chasing returns and making changes to your asset allocation can be disastrous for your long term goals. “Nothing destroys a long term plan more than short term volatility as it produces an urge to do things emotionally rather than rationally. It is important that investors have an asset allocation plan based on their goals, risk taking ability etc. and then that they stick to this plan,” Gunwani says. Edited Interview.Sensex is hovering near the historical 50k mark. The market is full of excitement and nervousness. What is your view and outlook for the market?Last year proved the wisdom of the adage - Time in the market is more important than timing the market. Virtually no one could have predicted the fall due to an unexpected pandemic and then the V shaped recovery in the market. Going forward it is important to step back and see the business cycle over the past few years and how it is likely to play out in the future. Our sense is over the last few years the Indian economy went through a series of challenges - high inflation expectations, asset quality in banking, weak global growth - and now the foundation is strong for a high growth phase. This will assist corporate earnings along with the fact that most industries are witnessing higher consolidation helping the larger corporate. A strong earnings growth cycle combined with benign interest rates are likely to drive reasonable market returns we believe in spite of near term valuations being expensive.Nippon India growth fund has completed 25 years with 20% since inception. How has the journey been?Nippon India Growth is one of our flagship funds and it gives us immense satisfaction that it has created a lot of wealth for its investors. The markets have evolved a lot over the last 25 years and it is due to the collaborative efforts of our entire team that has helped ensure that the fund has generated such a strong long term track record. Small and mid-cap funds are doing well. The rally has given big returns to mutual fund investors. How do you see the returns and valuations in the space in the near future?We believe that the small and midcap space is likely to continue its outperformance in the near term primarily due to three reasons. First the broader market started correcting in early 2018 itself so till March'2020 there was a steep correction in both price and time. Secondly the composition of the large and midcap segments is such that in a phase where both global and domestic economic recovery is strong the midcap segment is likely to see a greater inflection in earnings. Finally the broader market tends to do well when global liquidity is high which we are seeing at this point of time.Banking sector has started picking up speed. The market believes that the growth in the economy is preceded by the rise in the banking sector. What is your view on this? Should investors take exposure in banking sector funds?There is definitely a strong correlation in the banking sector performance and overall economy. Hence if the economic recovery, which currently is shaping up to be much stronger than expected, continues its momentum then banking stocks will do well. The other positive for banking stocks is that the business is very scalable inherently and with market share gains accruing to a few players the growth rates of the leaders can be very healthy. Hence well managed banks and NBFCs can be good candidates for a buy and hold approach. Given the bright outlook for the economy, banking sector funds are an attractive way to play the theme.Is the market still predicting uncertainty due to Covid? What are the challenges in front of the industry in 2021?Currently global markets are not giving high weightage to COVID related issues as the progress on vaccination is quite promising - there have not been any serious side effects due to the vaccines. The tail risk here could be any new issue related to vaccine rollout can impact the markets. The other big risk for markets is if inflation increases beyond expectations - as economies emerge out of the pandemic related slowdown growth is expected to pick up and inflation is expected to go up to a certain extent. However if this is faster than estimated then the global liquidity being injected by central banks like the Fed will be under threat and that can be a big negative for markets.In times like these, many new investors get in to chase returns. What is your advice to the new and the existing mutual fund investors?There is a lot of evidence to demonstrate that the key to long term wealth is disciplined asset allocation. Nothing destroys a long term plan more than short term volatility as it produces an urge to do things emotionally rather than rationally. It is important that investors have an asset allocation plan based on their goals, risk taking ability etc. and then that they stick to this plan.

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