The markets rallied in opening on Monday after exit polls suggested the election will give a clear mandate for the BJP-led National Democratic Alliance. But how would the market gains play out ahead of the vote counting on Thursday? Pankaj Pandey, head of Research of ICICI Direct, discusses volatile markets and asset allocation needed during such periods. He also shed light on investment strategies for retail investors to maximise their profits. Edited excerpts:

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1. Where would the markets head after the Lok Sabha election results?

Historically, elections have largely been positive for equity markets as clarity over the next 5 years sets in paving the way for strong momentum. Last 3 general elections years have witnessed robust equity returns (~13 percent - 2004, 81 percent - 2009, and 20 percent - 2014) and none of the general election years in last 30 years (except in 1998 when the index went down by 16 percent given weak coalition government) have resulted in negative returns for equities. Therefore, we expect the markets to continue its positive trajectory with key drivers being stable domestic macroeconomic setup and corporate earnings growth.

2. Which sectors do you think would give positive returns in the near-term?

Among the sectors, we remain positive on Banks (Peaked out NPA cycle, Asset resolution and relatively robust earnings) and Infrastructure/ Capital Goods (strong execution & order inflows, benefits of benign interest rates) in the near term.

3. Do you suggest investing in mutual funds or direct stocks considering the current volatile market situation?

Direct stocks can offer better investment opportunities during volatile environment as the correction in respective stocks can be far more than the broader market. However, to capitalize on such opportunity, you need expert market advice as lower price can turn out to be value trap as well. Mutual fund in general are more diversified having 30-40 stocks and therefore a low risk-low return proposition as compared to a particular stock.

Therefore, if investors can conduct own research or through expert advice, are able to invest in direct stock, they can create higher wealth than mutual fund. For all other category of investors, mutual funds are better placed.

4. What is your investment strategy for turbulent times like these?

We continue to remain constructive on long term outlook for Indian equities given the underlying strength in domestic economy and favourable setup for corporate earnings growth ahead. In fact, period of volatility is best suited for long term investing in equities wherein investors can focus on building portfolio through SIP/TIP rather than waiting for timing the market through lump sum investment.

5. What is your view on the global markets selloff? Could it further affect Indian markets?

On the global front, the recent selloff has largely been due to knee-jerk reaction to the trade talks between US and China falling through, and volatile crude. However, crude is a bigger variable for India and given the medium term global growth challenges and increasing US production, the crude outlook is benign. Therefore, global concerns is not major issue currently.

6. Where and how should a new investor allocate his/her funds?

Asset allocation depends on risk appetite, investment horizon, financial goal and age of investor. In general, only three asset class viz. Equity (direct or mutual fund), debt (mutual funds or bank/corporate deposits) and Cash (liquid funds) are sufficient to ensure effective diversification. Exposure to these asset classes could vary depending upon above mentioned parameters.

A new investor should start with mutual funds for equity exposure and once gains expertise may start investing directly in stocks as well. The allocation to equity exposure should move up gradually over a period of time. SIP in mutual funds or even in stocks is good starting point for new investors.

7. Which type of mutual fund would give better returns — equity funds or hybrid funds?

Since hybrid funds are a mix of equity and debt funds, comparing both the category in terms of pure return is not advisable.

In general, since in India equity as an asset class is expected to do better than other asset classes over a longer period of time, equity funds are better placed to deliver higher returns than hybrid funds. However, it needs to be understood that equity funds are bound to be more volatile than hybrid funds.

Expert Estimates is a series of interviews containing analysis and commentary on what’s moving the markets and outlook, among other things.

First Published:May 20, 2019 11:29 AM IST