Equities outperform other asset classes and generate higher inflation-adjusted returns: Sanjiv Bajaj

While equity markets are on a high, there are fears that rising inflation might spoil the party in the coming days. In an interview to Money9, Sanjiv Bajaj, Joint Chairman & MD, Bajaj Capital provides insights on the road ahead for equity investors and how he sees inflation impacting various asset classes and what investors should do

Stock market indices are hovering near their all-time highs? Do you think equities are a good investment avenue in the current circumstances?

For a retail investor looking to invest in equities for the long term, there is no such thing called ‘right time’. Rather than trying to time the market, it’s the time in the market that is important for building wealth. Stock markets do not travel in a linear route and there can be several dips and spikes over a long period. One may use the dips as an opportunity to add more to the portfolio rather than exiting and making ad-hoc investments.

What are the sectors that look good for investment at this point?

Rather than choosing to go overweight on any specific sector, investors should keep their portfolios diversified across the primary sectors such as financials, technology, infrastructure, pharmaceuticals, energy etc.

Inflation is making a strong comeback in various countries, including India. What impact do you see on equities?

Rising inflation means falling purchasing power of the rupee. Effectively, inflation eats into the returns generated by any financial instrument such as equity, bond etc. Although, a bit of inflation with a corresponding rise in interest rate is inevitable when the economy shows signs of growth, how far the RBI is able to tame it remains to be seen over the next few months. Therefore, there may not be an immediate impact on stock prices unless inflation moves into uncontrolled territory. In the long run, equities have shown to outperform other asset classes and generate high inflation-adjusted returns than other asset classes.

How should investors look at fixed income investing in the midst of rising inflation?

Bond prices are inversely proportional to the movement of interest rates. When inflation rises, the rate of interest also moves up leading to fall in bond prices. This is because new investors dump existing bonds carrying a low coupon rate in anticipation of new bonds with higher rates of interest. So, if there is an expectation of rising rates (because of inflation), bond prices fall and so do the NAVs of debt funds. This is a crucial period for debt fund investors as rates may start to move up even though the RBI has been taking steps to keep it low. So, in these circumstances, investing in debt funds with a lower maturity period helps rather than buying long-dated debt funds. Choose to park funds in short-term or medium-term debt funds rather than debt funds with longer maturities.

So would you advocate a change in asset allocation in one’s portfolio in view of inflation?

Rising Inflation may arrest the slide of the interest rate in the economy. To an investor, a tweak in the asset allocation may be required to not only protect the portfolio but also gain during these times. The exposure to various assets is done with the objective to beat inflation i.e. generate inflation-beating returns. But, if the inflation itself rises, it’s time to revisit your allocation to assets and revise their allocation.