Equity investments are a good tool for long-term capital appreciation, says Devender Singhal of KMAMC

Equity investments have become a great source of long-term gains over the last many years, says Devender Singhal, Fund Manager, Kotak Mahindra Asset Management Company.

In an interview withMintGenie, Singhal said that equity investments are always accompanied by higher risks and related volatility. A Special Opportunities Fund is no exception.

Edited Excerpts:

With the market in froth and experts asking investors to be careful of the hype, is this the right time to look for special opportunities to invest in?

The market is currently at valuation multiples which may not be called attractive, more so, for mid caps and small caps where the valuation premiums are above long-term averages. We don’t see a case for multiple expansions over the next couple of years (especially for mid caps and small caps). In this scenario, Alpha generation would come along with unique opportunities where you may see a case for both earnings growth accelerating and the scope of valuation multiples expanding. This fund seeks to invest in these very special opportunities. So, yes, we do think that this is the right time for such a fund.

You will be managing a “Special Opportunities Fund”. What according to you comprise special opportunities?

Special opportunities can come in any form. It can be by way of (a) policy changes in India and abroad, (b) mergers and acquisitions, (c) demergers, (d) management change, etc. There are further opportunities to look at operating leverage turning into financial leverage, industry consolidation, buyback, etc. So, the canvas is pretty wide to look across the market for such opportunities.

What type of investor is best suited for Special Opportunities Funds? Are there specific financial goals or risk tolerances that align particularly well with these funds?

Equity investment is always accompanied by higher risk and related volatility. This fund is no different in that case. However, when you are focusing on bottom-up stock picking, you look at a disproportionate risk-reward scenario loaded in your favour.

The last AMFI data underlined investors making a beeline for thematic funds. What is your view on the same?

Thematic funds generally have a much focused approach towards a particular sector or theme. These are hence used as a flavour to the overall equity exposure when an investor wants to play a specific theme more than any other. These funds, if used proactively, can add potential alpha to a client’s portfolio return.

More investors are moving to equity investments. What is your advice to them?

Equity investments are a good tool for long-term capital appreciation. They have become a great source of long-term gains over the last many years. This also results in money being more productively used for a country’s growth and reap rewards over the long term.

What people see in equity investment is returns. What gets missed out is ‘Risk’ because it’s unseen.

In the market, it’s always important to have a view on both risk and return and then move ahead. Many times investors just focus on the return part and that is the time mistakes happen. Moreover, it’s always better to seek professional advice while investing in equity markets. Just remember, “There are no free lunches”.

Do you have reason to believe that the coming back of the incumbent government may prompt investors to invest majorly in equities and ignore the significance of fixed-income instruments?

A stable government with a growth orientation is something all investors ask for. So, yes, the coming back of the incumbent government is rekindling the hopes of investors of policy reforms continuation and acceleration in coming years. We are also seeing flows into the equity market increasing post the government formation. However, it would be wrong to say that investors are ignoring fixed-income instruments as we are seeing deposits increase as well. So, investors are looking at both asset classes, though the noise around equity investments is a bit more in the current scenario.

How much allocation do you advise to equities for investors looking to create a sizable corpus in the long run, say 20-25 years?

Investors who don’t need money for the next 20-25 years should have a sizable allocation towards equity. This will surely help her create a nest egg for her future needs. However, there is no one rule which fits everybody. It all depends on your cash flows and risk profile.