'Important to assess all investment options'

'Then select those that are well-aligned with your risk-return profile and investment time horizon.'

Mid and small-caps must be handled cautiously, given the imminent tapering by the US Federal Reserve and the squeeze in liquidity, Umang Papneja, executive director & CIO at IIFL Wealth Management, tells Ashley Coutinho/Business Standard.

Which are the areas of opportunities for investors?

There exist multiple opportunities for the long-term investor to create wealth. Domestic demand is improving with rising income levels and rapid urbanisation giving a fillip to the demand for healthcare, consumer durables, communication, entertainment, recreation and travel, among others.

Second, the government is making concerted efforts to accelerate the capex cycle, which is only likely to pick up further in response to rising consumption demand.

The government is focused on expanding the manufacturing sector and localising the manufacturing ecosystem through the PLI (Production-Linked Incentive) scheme, thereby significantly reducing external dependencies.

The housing industry seems to be entering an upcycle after a long hiatus and can potentially have a positive impact on a wide range of industries. However, one must be circumspect, as inevitably there will be stocks that have run ahead of fundamentals.

What is your take on mid and small cap stocks at this juncture?

The mid and small-cap space always has the potential to generate alpha over the long-term. Investors, however, must do a thorough analysis of the companies as the nature and stage of businesses in the space also amplify investment risks.

These companies are likely to partake in the India growth story and specifically benefit from both the government's PLI scheme and the current thrust on digitisation. But given the tapering by the US Federal Reserve and the squeeze in liquidity, this space needs to be navigated more cautiously.

Has the risk-on sentiment returned among high net worth or wealthy investors?

While growing wealth remains a key goal, another equally important goal for the wealthy is to preserve their wealth. Thus, the risk-on sentiment is never very high among wealthy investors.

Investment decisions are primarily driven by the asset allocation strategy, which reflects the changing investment landscape along with changing investor circumstances. So, if the asset allocation strategy demands a certain exposure to equity investments, then that exposure is fulfilled.

On the other hand, if asset allocation dictates that equity exposure should be kept at a minimum, then investor portfolios are created accordingly.

Within equities, the idea is to always invest in high-growth and robust companies that are available at compelling valuations.

Are there any takers for credit risk funds and AT1 bonds?

The spreads between G-Secs, perpetual bonds and other credit papers are in the 100 to 150 basis point range. This might not be adequate compensation for the risk undertaken for such instruments.

As global liquidity tightens, there is a possibility that these spreads may widen. We would prefer to wait for a few months for an opportune time to evaluate any exposure to such instruments.

What are your views on gold as an asset class?

During times where real interest rates are lower than inflation, gold does well as an asset class. Globally, we are set to see extended period of negative real rates, and this augurs well for gold. The exposure to gold again will be driven by the asset allocation strategy an investor adopts.

Is there more emphasis on asset diversification across physical assets?

Diversification through optimal asset allocation has always been one of our key portfolio building tenets. As mentioned earlier, housing is coming out of its hiatus and negative real interest rates are good not just for gold but also other physical assets. This warrants a case for having higher than traditional allocation into physical assets.

The right asset allocation strategy can ensure that your portfolio is able to generate optimal risk-adjusted returns while being minimally impacted in volatile market conditions.

In order to achieve optimal asset allocation, it is important to assess all investment options that are available and then select those that are well-aligned with your risk-return profile and investment time horizon.

From that perspective, we prefer not to limit exposure and usually consider several investment options including foreign investments and investments in physical assets. The goal is to ensure that the investment 'fits' into the client's requirements.

What are your plans for IIFL Wealth in the coming months?

The number of unicorns is rising in India and so are the HNIs and UHNIs. To mitigate risks and maximise returns, investors are looking at pooled investments especially in the start-up space.

As a leading wealth management firm which has pioneered innovative products, we continue to focus on providing the right mix of proposition and platform. Our suite of offerings will ensure we manage to provide the best fit of products suited for our clients.