Asset allocation is key in 2023, says Chirag Mehta of Quantum Mutual Fund

Budget 2023 is around the corner and the mutual fund industry is expecting some of their wishes might come true in February. Mutual funds haven’t gotten any sops in the last few budgets, but MF players believe that the government has to take some steps to make the industry better. Shivani Bazaz of ETMutualFunds spoke to Chirag Mehta, CIO, Quantum Mutual Fund, about his expectations from the Budget and also from the new year. “Gold needs reform if we really need the financialization of gold to happen. So many trillion dollars are lying in gold, if we really want all that to come to the financial system, we need some steps. You need a stepping stone because people are not going to shed the physical attachment they have with gold,” said Mehta. Edited Interview.

As the budget is around the corner, let us start with your expectations from the forthcoming budget.
Certain things that we believe should happen for the betterment of the industry is the betterment of equity FOFs. It is a great product and in India it hasn’t picked up as much as it has globally because of taxation. If the budget can give the tax parity to equity FOFs like the equity funds, it will increase the psychological acceptance of the product. This is something that leads to a better investing platform for investors.

Also, something like gold needs reform if we really need the financialization of gold to happen. So many trillion dollars are lying in gold, if we really want all that to come to the financial system, we need some steps. You need a stepping stone because people are not going to shed the physical attachment they have with gold. Gold mutual funds and gold ETFs are the first step in this because the backing is physical.

About LTCG, I think it hasn’t impacted the inflows or the investors in equity mutual funds. The sheer amount of money that has flown into mutual funds is proof for that. If we do away with the tax, of course it will be better but I don’t see it as an impairment for a product like mutual funds. I believe if like debt the LTCG is removed if the holding period is say three years, that would be a win win for both investors and the government.

A lot of investors start their investments at the beginning of the New Year. What is your outlook for 2023? Equity, debt and commodities?
2022 was a great reminder for why investors should have an asset allocation in place, not to only two but three asset classes. In 2022, equity was underperforming, debt was struggling and gold was a good hedge for this. Two asset classes are not enough for diversification is what we took away as a learning. A multi-asset allocation fund would have done better than a pure equity or a pure debt fund in 2022. We are seeing capex revival because of growth and government push. I feel that the government will keep pushing the growth and now we are into the growth phase. Overall, equities look promising this year. However, asset allocation should be key in 2023.

If you look at banks, the deposit growth is lagging the credit growth. I think the RBI is going to ensure that there is ample liquidity in the system. From a debt market perspective, I think much of the rate hikes are behind us. However, there will be some uncertainty going down the line because RBI will want the inflation to come down to a lower level. Some rate hikes can not be ruled out. The three-year duration debt funds look better in this situation. We have always maintained that all those who understand the debt market should participate in duration funds and stay away from credit debt.

Net-net, all three asset classes equity, debt and gold are looking promising in 2023.

Value style is trending at the moment. What are your thoughts about that? How is the Quantum Long Term Equity Value Fund placed?
If you look at the backdrop from 2017-19, it was a scenario of more liquidity, cheap money and chasing growth. Then came 2020, shock of covid came, risks were priced in the market. After that central banks came in and brought a lot of liquidity. We saw inflation coming back and the rate began to rise, the cost of money increased. This got the value style of investing back.

We think that the higher rates are not coming down any time soon. Inflation might come down but may remain sticky to the higher level. In that scenario, value should keep doing well. As the money gets expensive, prices rise, therefore value as a style will keep doing well. We see this scenario staying for another couple of years. I believe when we talk about diversification, style diversification is also important. Core allocation to value large caps is a good idea for investors.

Quantum has also been big on ESG investing. The theme has been out of favor for some time after the war and global energy crisis. What are your thoughts about that?
ESG as a style invests in sustainable companies that are high quality. Quality as a style has underperformed in the last one year. ESG looks at companies that bring quality at a price tag and are usually growth oriented. Last year has been difficult for ESG globally and for our fund as well. But if you look at the performance since inception, the Quantum ESG Fund is still beating the indices. There was a give up on ESG and sustainability globally from the governments as well. This was because the last year was about survival as opposed to ambition. Countries like Germany who were the front-runner in the ESG investing, allocated to coal mines etc.

On the other hand, there is huge evidence that climate change is impacting economic activity. Europe in December was around 20-25 degrees as opposed to previous years’ temperature at 0 and below that. Climate change is impacting livelihood and businesses. Hence, I believe that ESG is going to come back aggressively next year.

How do you see the valuations in the equity market right now? Are there any specific sectors that you favour right now and why?
We are optimistic on Autos, not only from a valuation perspective but from a growth perspective also. Apart from autos, banking is expected to do well as credit growth is picking up. Third sector that is a value buy is IT. Tech right now is in a similar state like it was in 2017 and then they came back with a vengeance. People are saying that recession is here and if it actually happens, the emphasis in the west will be on cutting costs. When you cut costs, technology is one thing that helps. The go to thing also becomes to hire people on lower costs in emerging markets like India. Therefore, we think that domestic IT has good growth ahead and the valuations are very attractive.

Overall, if you look at India, we are slightly over the average valuations but it is not overly expensive. There are enough pockets in the market that offer great value at the moment.

What is your advice for new and existing investors in 2023?
As I said already, asset allocation is the key. Don’t chase returns in one asset class and forget the rest. Always have a vision and stick to your asset allocation. As an outline, I would say new investors, especially young investors should have an emergency corpus before they start investing. Build your core allocation in equities and top up with debt and hedge with gold. Restrict your play money and tactical bets. Balance is the best way to go for investments.