wealth creation ideas: Want to create long-term wealth? Here are Pradeep Gupta’s 5 rules for portfolio construction

“Investors need to define a solid asset allocation, between equities, debt and commodities, and then proceed to select the sub-categories within them,” says Pradeep GuptaCo-founder & Vice-President, Anand Rathi Group.

In an interview with ETMarkets, Gupta said, “An asset allocation strategy with a well-diversified portfolio is key to managing risk and ensuring a low deviation from expected outcome” Edited excerpts:



We saw a rebound in July. Can we say that the worst is in the price now? What is your vision of the markets?
I think the main downside risk to the Indian economy and markets comes from global crude oil prices and the pace of policy tightening – interest rates, liquidity, and stopping fiscal stimulus – in developed countries.

The weight of evidence suggests that crude oil prices will fall to $90 a barrel in the second half of 2022. That’s nearly $40 a barrel lower than the peak we’ve seen in the recent past, but considerably higher. than what prevailed 12 months ago.

Rising oil prices will limit the outperformance of Indian equities relative to their peers. In the near term, we expect policy tightening in developed countries to be greater than currently expected and so this would be a negative surprise for global financial markets as well as Indian equities.

At the same time, the signs of a general slowdown in growth and the fear of a recession should make the political authorities of the developed countries more circumspect about the continuation of these policies.

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Therefore, beyond the very short term, policy tightening could slow significantly. This should help stock markets bottom out and then rally.

What’s your take on the FII releases we’ve seen so far in 2022?
There are three main factors that drive the equity market: fundamentals, both macroeconomic and corporate, the flow of cash to the equity market, and equity valuations.

In terms of fundamentals and valuations, India is better placed than most major economies. The domestic flow to the stock market is also supporting a buoyant stock market.

However, global risks and the resulting foreign portfolio outflows from the Indian stock market have been the main reason why Indian equities remain well below the all-time high recorded in mid-October 2021.

As most of the global risk is priced in equity markets, in the absence of new shocks or negative news, the market is likely to go into consolidation mode, which may eventually lead to a market rally if the investors’ risk appetite returns.

As India has corrected and faces an outflow of foreign portfolio investment with global markets, as the situation stabilizes globally, attractive fundamentals and valuations would attract capital to India .

Given these elements, we are not surprised that, in the recent past, foreign portfolio investors’ sentiments seem to be turning positive towards India.

What do you think of the rupee? Do you see it breaking the 80-81 mark in the current fiscal year?
We’ve seen the Indian rupee fall past the $80 mark against the US dollar, bringing its year-to-date drop to around 7%.

The main reason for this sharp drop in the rupiah was the outflow of foreign investment coupled with rising crude oil prices.

India is a net importer of crude oil and as global oil prices have risen over 60% since the start of 2022, Indian companies have to shell out more dollars, which means increased demand for dollars and therefore a weaker rupee.

We expect short term volatility to persist, but longer term we expect the currency to stabilize.

What do you think of the results for the June quarter? Which sectors will be targeted and which might be lagging behind?
I refrain from talking about individual company results. The weight of evidence on corporate earnings for the quarter ending June 2022, however, suggests earnings are in line or the extent of positive surprise is more than negative surprise so far.

This bodes well for our medium to long-term positive view of the equity market.

How do you approach the markets – bet on defensive stocks or high beta stocks?
Stocks as an asset class are very volatile in the short term. Yet the long-term risk-adjusted return of equities is generally much higher than that of any other asset class.

This simple fact is often overlooked by investors, resulting in large losses through speculation and market timing attempts.

So I think the biggest hidden opportunity is to stay invested in stocks in the face of negative sentiment and short-term market corrections.

Q) Gold is leading the charge at least in the first six months of 2022. What should be the right asset allocation strategy to follow?

At some point, markets would either be up or down, but a well-diversified asset allocation strategy not only helps create alpha during a positive market move, but also provides a cushion for that your portfolio does not fall as much as the markets during periods of volatility.
Asset classes are broadly divided into equities, debt, commodities and real estate; they are then broken down into stocks, mutual funds, bonds, gold, etc.

Different types of assets carry different levels of risk and potential return, they generally do not react to market forces in the same way at the same time.

For example, investing directly in socks is considered high risk as opposed to equity mutual funds. FDs or mutual funds are generally considered low risk assets due to the low volatility they perceive.

So, we have to work on a top-down approach. Define a solid asset allocation, between equities, debt and commodities, then select the sub-categories that compose them.

An asset allocation strategy with a well-diversified portfolio is the key to managing risk and ensuring a low deviation from the expected result. Everyone’s risk-taking abilities differ and there are different ways to measure your risk tolerance.

Investors should understand the overall risk associated with the asset allocation strategy. A strategic allocation in gold as a commodity can be considered with a maximum allocation of 5 to 10% in the overall portfolio.

How do you choose stocks to invest in? If you can help us with 3-5 rules?
Here are some rules investors should follow –

Avoid speculation:

By nature, the stock market is volatile in the short term. Short-term speculation in the stock market can be very dangerous for investors’ portfolios.

Long investment horizon:

Past data also suggests that over the longer term, the risk-adjusted return of equities is generally the best of all asset classes. Therefore, my suggestion to retail investors is to have a longer investment horizon to profit optimally from the stock market.

Strategic portfolio allocation:

I believe in strategic portfolio allocation where the key decision is asset allocation between competing asset classes like stocks, debt, term deposits, real estate, gold and various other assets .

Stocks are one of the most attractive asset classes for long-term investors. However, in the short term, stocks are very volatile. Therefore, the equity allocation must relate to a longer period spanning at least three years.

Avoid tip-based news:

My advice to retail investors would be to avoid tip-based investments or short-term news feeds. They need to consider three things when choosing long-term stock prices: fundamentals (both macroeconomic and corporate), stock market liquidity, and valuation.

You need to have a fair idea of ​​these over a 3-year period to invest in individual stocks.

Timing the market:

It is almost impossible to consistently time the market. Our study of the Indian stock market over the past 30 years also suggests that rather than trying to time the market, investors are better off if they can avoid making hasty decisions on both buying and selling. of assets into shares.

We believe the best strategy for equity investors is to decide on specific allocations in different asset classes, including equities, based on their own risk appetite and resources. Thereafter, investors should stick to strategic asset allocation rather than being swayed by short-term market movements.

Do you think the slowdown in commodity prices would lead to a sharp turnaround in equity markets?
I think the main downside risk to the Indian economy and markets comes from global crude oil prices and the pace of policy tightening – interest rates, liquidity, and stopping fiscal stimulus – in developed countries.

The weight of evidence suggests that crude oil prices will drop to $90 a barrel in the second half of 2022.

That’s nearly $40 a barrel lower than the peak we’ve seen in the recent past, but considerably higher than what prevailed 12 months ago. Rising oil prices will limit the outperformance of Indian equities relative to their peers.

In the short term, we expect the policy tightening in developed countries to be greater than what is currently expected and so this would be a negative surprise for global financial markets as well as Indian equities.

At the same time, signs of a general slowdown in growth and the fear of a recession will probably make the political authorities of the developed countries more circumspect about the continuation of these policies.

Therefore, beyond the very short term, policy tightening could slow significantly. This should help stock markets bottom out and then rally.

(Disclaimer: The recommendations, suggestions, views and opinions given by the experts belong to them. These do not represent the views of Economic Times)

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