This year's Budget will be expansionary, like 2021: Swati Kulkarni, UTI AMC 

Finance minister Nirmala Sitharaman will present the Union Budget on February 1. There are hopes that the government will focus on growth amid the ongoing uncertainty over the Covid pandemic. In an interaction with Business Today, Swati Kulkarni, executive vice president and fund manager-equity, UTI AMC shared her view on the upcoming Budget and Indian equity market. Edited excerpts.

BT: Which are the important announcements do you expect in the forthcoming Budget for the mutual fund industry? 

Kulkarni: We expect announcements to bring in uniformity in capital gains tax on gains from insurance company ULIPs (unit-linked insurance plans) and units of equity mutual funds.

BT. Which sectors will be in focus?

Kulkarni: We think that the expansionary approach that the last year’s budget took will continue with an objective to support growth by focusing on large employment-generating infrastructure spends. There could be important announcements on high-speed rail, river linking projects, the road map for green energy adoption.

BT. Coming to the equity market, how do you see the performance of broader markets over largecaps in 2022?

Kulkarni: Valuation across market capitalisation is at an elevated level. Small and mid-cap indices’ valuations are at a premium to large-cap against the historic trend of discount. While the entire spectrum of market cap is vulnerable to exogenous shocks, small and mid-cap space could see higher volatility than the large caps. We expect a better risk-adjusted performance of large-cap and quality midcaps as against the small caps in the near term.

BT: Which sectors may deliver solid returns this year?

Kulkarni: The savings for middle to high-income groups have increased in the past couple of years. With increased vaccination and mobility, consumer confidence is likely to improve leading to a pick-up in discretionary consumption. So, automobiles, building materials, personal care, consumer durables are likely to see volume growth. Most of these sectors have been adversely affected due to sharp raw material inflation and lacklustre volume growth resulting in margin compression.

As the inflationary pressure subsides with supply improvements and companies pass through extant cost inflation, the operating leverage benefits are expected to boost earnings growth. Financials with clean balance sheets and adequate capital is well equipped to grow and we expect the credit growth to be initially driven by the mortgages, other retail loans and government capex spend.  

In addition to strong domestic demand tailwinds, the pharmaceuticals sector could also see improvement in export opportunities in the developed market with the normalisation of health activities and plant inspection clearances.

BT: IPO market kept buzzing in 2021. Will 2022 again break the record in terms of new listings?

Kulkarni: The year 2021 witnessed IPOs raising a record $15 billion vs $4 billion in 2020. Private equity or venture capital investments have also been at a record level in 2021. Apart from the market sentiment, the expectation of unfolding of long-term growth opportunities for India from new-age businesses in select sectors like education, health, financial services, specialty chemicals would have been the key catalyst. The pipeline of IPO is strong for 2022. Investors however would have to be selective and cautious given the market frenzy and limited historic data on the companies’ business models.

BT: Annual SIP inflows crossed Rs 1 lakh crore last year for the first time. How do you see the flows in 2022 amid low-interest rates on fixed deposits?

Kulkarni: Lower relative returns from alternative savings avenues would be supportive, however large bouts of volatility in the equity market may un-nerve unseasoned investors at the margin. We think that the awareness of equity mutual funds has increased thanks to the efforts of the industry and distribution fraternity particularly, new age distribution platforms. 

More investors are understanding the long-term wealth creation potential of equity mutual funds, the concept of building investment with small regular contributions and rupee cost averaging and yet there is a large untapped potential. SIP, we believe is a structural change in the way investors approach their savings and hence expect sustenance of the trend.

BT: What is the right asset allocation strategy?

Kulkarni: There is no one asset allocation that is suitable for everybody. Most important is to understand investors’ risk-taking ability, willingness to take risks besides the financial goals and investment horizon. Equity assets have outperformed all asset classes including real estate over a long period of 15 years. The analysis of UTI Mastershare’s rolling returns over the last 15 years, shows that the probability of earning more than 8 per cent return improved substantially from 55 per cent for 1 year, 74 per cent for 5 years to 100 per cent for 10 years holding period.  

Thus, for those who have a long investment horizon and are willing to take the risk, higher equity allocation can be suggested. Given the current market valuation, a systematic transfer plan (STP) approach could be taken in addition to regular SIP. For near term financial needs, debt funds with short duration and accrual products may be considered to mitigate the risk of rising interest rates. Gold investments help in extreme risk off situations and may be limited to 10 per cent.

BT: Any advice would you like to give to investors for 2022?

Kulkarni: Brace for volatility as the easy liquidity period is expected to taper off. Be very selective and extra cautious if investing directly in stocks. Continue with the desired asset allocation and invest in equity regularly through SIP in equity mutual fund. Choose a growth option for equity investments to realise the benefits of compounding over a long term rather than the income distribution cum capital withdrawal plan.

Apart from using the debt mutual fund for near term cash flow needs, investors having regular cash flow needs could also opt for systematic withdrawal plans (SWP) on equity mutual fund investment, which would help them participate in the long-term growth potential of the Indian equity market.

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