Samvat 2083: How should investors position their portfolios amid changing market trends?

After a volatile year marked by geopolitical tensions, changing commodity prices and shifting market leadership, investors may need to rethink how they allocate their money. Sandeep Tandon, Aashish Somaiyaa and Ashish Shanker explain why multi-asset funds, specialised investment funds (SIFs) and income-generating instruments could play a bigger role in portfolios.

The past year has brought sharp changes in investor preferences. Gold and silver attracted strong interest, global equities drew attention and small- and mid-cap stocks continued to feature prominently in investment discussions. However, recent market movements have also highlighted how quickly investor favourites can lose their appeal.

As investors look towards Samvat 2083, the challenge is to build portfolios that can withstand changing market conditions rather than chase whichever asset class has performed best.

In an interview with CNBC-TV18, Sandeep Tandon, Founder and CIO of Quant Mutual Fund; Aashish Somaiyaa, CEO of WhiteOak Capital Asset Management; and Ashish Shanker of Motilal Oswal Private Wealth discussed the investment lessons from the past year, the growing relevance of newer investment products and the areas where investors should exercise caution.

Why investors should not chase the latest market winners

Investors often change their allocations based on the recent performance of different asset classes. When gold and silver rally, they want greater exposure to precious metals. When global equities outperform, attention shifts towards overseas markets. A similar pattern has played out with small- and mid-cap stocks.

Aashish Somaiyaa believes investors often draw the wrong conclusions from these changes in market leadership. Instead of constantly moving money between asset classes, they should focus on building diversified portfolios from the outset.

He also pointed out that concerns about geopolitical tensions, oil prices, currency depreciation and capital outflows are not new to Indian markets. Similar worries have surfaced several times over the past 27 years, including during 1998-2002, 2008-09, 2012-13, 2019-20 and 2022.

The problem, according to Somaiyaa, is that investors tend to remember the immediate past and treat every fresh crisis as an unprecedented threat.

"All past crises feel like missed opportunities. Only the current one feels like a threat," he said.

Ashish Shanker echoed this view, pointing out that investors repeatedly gravitate towards assets and market segments that have recently delivered strong returns.

He cited October's market performance as an example, when large-cap stocks outperformed mid- and small-caps by nearly 8-10%. The shift underlines why investors should not rely on past returns when making allocation decisions.

Why multi-asset funds could become more important

Multi-asset funds allow money managers to invest across different asset classes instead of relying exclusively on equities or a particular market segment. This flexibility can be useful when market leadership shifts and opportunities emerge in different parts of the investment universe.

Sandeep Tandon is particularly bullish on this category. He believes multi-asset funds could become larger than the flexi-cap category over the next eight to 10 years.

According to Tandon, these funds give money managers considerable flexibility in asset-class allocation without restricting them to particular market capitalisations or sectors.

While multi-asset funds have gained traction globally, he believes the category still has considerable room to grow in India. Inflows over the past year suggest that investor interest is picking up.

He sees the category remaining relevant over the next five to seven years, particularly given the volatility and uncertainty in financial markets.

How can REITs and InvITs fit into an investment portfolio?

Real Estate Investment Trusts (REITs) and Infrastructure Investment Trusts (InvITs) are other instruments that investors could consider, particularly when looking for income-generating alternatives to conventional equity investments.

Somaiyaa highlighted their underlying asset structure as an important distinction from conventional equities.

While stock valuations depend on expectations of future earnings and the prices investors are willing to pay, REITs and InvITs have underlying assets that generate regular income. This can make them less volatile than conventional equities.

He also believes these instruments are more appropriate for investors seeking regular income than relying solely on dividend-yield stocks.

Somaiyaa said REITs and InvITs had delivered double-digit returns over the preceding three years. However, without assuming that this performance will continue, he believes high single-digit to low double-digit returns could be a reasonable range to consider. REITs typically deliver high single-digit returns, while InvITs have the potential to generate somewhat higher returns.

He also sees a role for hybrid SIFs, particularly for investors looking for alternatives to traditional fixed-income investments. These strategies could offer additional returns alongside tax efficiency, depending on how they are managed.

What are SIFs and how do they help manage investment risk?

Specialised Investment Funds (SIFs) are another investment category that could change how fund managers manage portfolios, particularly through the use of long-short strategies.

In a conventional long-only equity strategy, a fund manager invests in stocks with the expectation that their prices will rise. SIFs can also take short positions, allowing managers to benefit from expected price declines in selected stocks or market segments.

This flexibility gives fund managers another way to manage portfolio risk, particularly during market downturns when small- and mid-cap stocks can face sharper corrections.

Tandon believes the ability to generate alpha through short positions is an important advantage of SIFs. Rather than relying entirely on rising stock prices, fund managers can use both long and short positions to identify opportunities across market conditions.

He highlighted the performance of different SIF categories, including hybrid long-short, asset allocator and equity long-short strategies. According to him, these products have delivered better risk-adjusted returns than comparable mutual fund categories over the past year, although the comparisons are not exact.

SIFs also offer flexibility in terms of asset allocation. Tandon pointed out that active asset allocator strategies can take positions in commodities such as crude oil, copper and zinc, giving fund managers access to opportunities beyond conventional equity and debt investments.

Can SIFs perform well when equity markets rally?

One concern investors may have about long-short strategies is whether they can keep pace with conventional equity funds during a strong bull market. If markets rise sharply, short positions could potentially limit returns.

However, Tandon said there is no regulatory requirement for SIFs to maintain short positions at all times. The extent of short exposure depends on the fund manager's assessment of market conditions.

He cited Quant Mutual Fund's positioning as an example. The fund house had maintained short exposure of around 25% when it was negative on the market. However, it reduced these positions from the end of October and was running with just 2% short exposure at the time of the interview. Tandon subsequently described the portfolio as being almost 100% long.

He also said that during a bullish phase between April and July-August, Quant's Ex Top 100 fund and the corresponding category across the industry had outperformed mid- and small-cap indices, even as those market segments performed well.

For Tandon, the ability to change exposure according to market conditions is central to the SIF proposition. These products do not necessarily have to sacrifice returns during a bull market by maintaining short positions.

"We look at the opportunity rather than restricting returns," he said.

Where should investors be cautious in Samvat 2083?

While the panellists identified several investment opportunities, they also highlighted areas where investors should avoid building exposure too quickly.

Global equities: Shanker believes investors should maintain global exposure as part of a diversified portfolio, but build it gradually. He pointed to the prolonged bull run in US equities and cautioned against assuming that recent performance will continue indefinitely.

He recalled that after the Nasdaq's strong rally between 1982 and 2000, the index did not generate returns for 13 years after 2000. His advice is to avoid rushing into global funds simply because they have performed well.

Small- and mid-cap stocks: Investors who have accumulated substantial exposure to these segments over the past five years may need to review their allocations.

Shanker pointed out that small- and mid-cap indices have performed well despite the broader market not delivering a comparable performance. He believes investors who have become overweight in these segments should consider shifting some exposure towards large-caps.

Somaiyaa also observed that large-caps, banks and IT, which had underperformed in the previous rally, were showing signs of a comeback.

Debt and hybrid funds: Shanker believes investors should not overlook debt as an investment option. With yields rising, he sees an opportunity to consider hybrid and balanced funds rather than concentrating entirely on equities.

What should investors take away for Samvat 2083?

The investment choices available to investors are expanding, but the central challenge remains deciding how much exposure to take and when to adjust it.

Multi-asset funds offer flexibility across asset classes, REITs and InvITs provide exposure to income-generating assets, while SIFs give fund managers additional tools to manage market exposure through long-short strategies.

At the same time, investors with substantial allocations to global equities or small- and mid-cap stocks may need to reassess their portfolios rather than increase exposure simply because these segments have performed well in the past.

The experts' broader message is that investors should prepare for changing market conditions instead of trying to predict every market turn. Diversification, disciplined allocation and an understanding of the risks associated with newer investment products will remain important as Samvat 2083 unfolds.

Watch accompanying video for full conversation.