Steer through volatility with Asset Allocation  : Nimesh Shah, MD & CEO, ICICI Prudential AMC


As we forayed into 2018, Indian markets were scaling all-time highs with the BSE Sensex breaching 36,400 levels. This unidirectional Bull Run led a majority of retail investors to believe that equities are a zero-risk asset class.

Suddenly, we saw flows to the tune of Rs 21,069 crores in January month into Equity and Balanced Mutual Funds. While it was a good sign that investors took to equity investing, helping financialization of household savings, it was worrying since it could also mean that investors had forgotten the meaning of the word ‘risk.’

Such that, investors started questioning the returns from debt as an asset class. Some thought equity markets had the potential to deliver sizeable gains in a month equivalent to what debt markets could provide in a year.

However, with nervousness emanating from both global as well as domestic factors, market sentiments turned. Recently, Sensex plunged over 3,000 points from its record high of 36,443 hit on January 29, 2018.

The recent fall in the market has been due to the fall in the global factor that has been gripped by news of the Trump-led administration all set to impose import duties for steel and aluminium. Second reason for the fall in global market has been due to the rise in bond yields in the US. With the US Fed increasing interest rates, there has been a flight to safety from global market, including emerging markets to the US. The global risk aversion has weighed heavy on the Indian market that had already discounted the positive news from higher Q3 GDP numbers for FY2018 as well as the recent state elections results.

With equity markets amidst volatile times, novice equity investors who were only witnessing the uptrend saw equities for what it really is.  Equities tend to be volatile in the short-term and investors are now taking cognizance of this risk.  This is a positive sign because such investors are likely to be more careful and think about investing in other asset classes as opposed to just equity markets.

In our view the Indian market is expected to remain volatile. The run up in the market was on expectation of improved earnings growth, which still hasn’t picked-up. We expect earnings growth to catch up in the coming 12 to 18 months. While there may be tailwinds such as steady crude oil prices, supporting the Indian market, ultimately it’s the corporate earnings that needs to fire which would drive the Indian equity market higher. Until then the Indian equity market will take a cue from the global markets. In such a scenario Indian market will continue to remain volatile.


By volatility we do not say markets are going to see a sharp correction, it will remain sideways. We expect earnings to catch up which will be positive for the markets. However, the headwinds for the markets are the rise in US interest rates. Even if the corporate performance improves, any parallel rise in interest rates will not see any meaningful gains in the market.


In our view both fixed income and equity markets will remain volatile. Volatility is a normal part of investing so investors shouldn’t be surprised. The way for investors to weather this kind of environment is to just focus on asset allocation.

Asset Allocation is the key

It is important to realize that Equity is not a zero-risk asset class, but certainly rewards patience and disciplined investing. Also, volatility, an integral part of financial markets, is a healthy phenomenon.

While equities may deliver reasonable returns, one must also downsize the returns expectations for medium-term, considering that market valuations are already expensive.

When any asset class is meaningfully undervalued, only then you can choose to invest most of your portfolio in it. If equity becomes a dirt-cheap asset class like 2008 or 2013, then it could have been wise to invest just in equities.

In the current scenario, we are not asking investors to avoid equities completely. On the contrary, retail investors should focus on asset allocation, i.e., invest in both equity and debt, or in MF categories like Dynamic Asset Allocation / Balanced Advantage Funds. Such funds invest in equities when markets are declining, and book profits from equities when markets are rising i.e. ‘Buy Low & Sell High’.

Add debt to your portfolio

We also recommend investing in debt, mainly through the low-duration Credit Funds.  In such funds, the duration risk is limited as the portfolio consists of ‘A’ or ‘AA’ papers. These have good potential at this point as the yields have gone up sharply. In fact, the yield-to-maturity on some of these categories is much higher than what it was.

Futher, considering the positive long-term outlook for Long duration funds, these can be suitable for systematic investing.  We expect short-term volatility in this category, particularly with global yields going up.  Systematic investing through volatile times helps average out the cost of investments and creates long-term wealth.

As such, investors must consider investing in a judicious mix of assets based on suitability, risk appetite, and investment horizon.

Opportunity through close ended Fund

India took 60 years to enter the Trillion Dollar Club. But it took approximately 7 years to double the size. With growing GDP coupled with young Population, Consumption as a theme appears to be a structural story for a sustainably longer period. The opportunities available here can be seen across discretionary and non-discretionary spends. Sectors that can benefit from consumption theme includes Consumer Non-Durable, Consumer Durable, Auto, Entertainment, Healthcare Services to name a few.

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