According to Mr. Vetri Subramaniam, Chief Investment Officer, UTI AMC, equity valuations across several measures are rich relative to their history. While there are pockets of value, investors should be cognizant of the risk from valuations. Aggregate market valuations have a bearing on forward returns of the asset class. The lesson from history is that valuations are not a perfect timing device — it is certainly not the equivalent of a school bell, which signals an immediate call to action — either to assemble or disperse. The recent correction is not meaningful in a historical context.
While all segments of the market are rich in terms of valuation, the small cap space is particularly challenging. Mr. Subramaniam has a bias towards large-caps at this point based on relative valuations. The principle in evaluation of mid and small caps is to filter for companies that exhibit a strong competitive position in their respective industry. Such companies could have financial metrics comparable to large-cap leaders except for their classification on market cap. The market cap is an outcome of the smaller sector or sub sector in which they operate.
Today, there is a combination of healthy data, happier headlines, and rich market valuations. This is the time to be disciplined about risk taking. Returns of the past year tell nothing about the risk and return of the next year. The biggest risks to the market are always the unknowns. Just because investors don’t see them does not mean they don’t exist. The greatest risk is overconfidence.
The financialisation of savings has a long way to go in India. There could be cyclical movements, but the underlying structural trend is positive. The behaviour of the SIP pipeline during this difficult period gives us confidence.
Mr. Subramaniam suggest that investors stick to their asset allocation framework, incorporating both equity and debt funds. Further stick to the systematic investing approach for both investment and withdrawals. Equity funds meet the long-term wealth creation needs of investors and debt funds can meet both short- and medium- term needs while balancing the aggregate portfolio. Hybrid funds have widely varying allocation patterns to meet the needs of different investors.
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