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Navigating the choppy waters... By Rupesh Patel, Senior Fund Manager, Tata Mutual Fund

Rupesh Patel

Rupesh Patel,
Senior Fund Manager, Tata Mutual Fund

Navigating the choppy waters...

Markets have bounced back from extreme pessimism that we saw towards the end of March. Some sectors of the market have clearly stood out in the recovery phase. In many instances the stock prices and valuations of companies in the winning sectors have gone beyond pre-covid level. We have also seen market breadth widening and mid and small cap participation in the rally going up.

The rally from March lows has once again proven that predicting direction of market moves is a futile exercise. It is interesting to note that in March/April, most of investor interactions used to be around the question - where would market bottom, whereas today discussions invariably go towards chasing the next big theme. Those who were extremely pessimistic looking at stock prices and news headlines in March have lost out on the big up move. The typical questions that are being asked today by investors are - Will the rally continue/ Should I invest more/ Should I book Profits now and invest later/ Should I invest in sectoral funds to make the most from the next big theme. These are very genuine questions however, It is very difficult for any body to consistently give right answers to such questions. Hence, instead of taking investment decisions based on second guessing market moves, investors would be well advised to invest according to their risk appetite and stick to the asset allocation plan which is best suited to their specific requirements.

Futility of investing based on second guessing market moves brings me to next important question and that is how do investors make money in equity markets. The answer lies in the fact that investors should not look at stock prices in isolation. It is the value of the underlying business that drives the stock prices and not vice versa. Hence, one should focus on understanding the drivers that will enhance the value of the underlying businesses.

For managing Tata Midcap growth Fund, our approach is to look for businesses that can grow sustainably over long period of time. For this we look for categories which have significant runway for growth. India is a young country with about 47% of our population being below 25 years of age. Penetration levels in Air Conditioners, Refrigerators, four wheelers and many such categories are significantly below many emerging countries. Further, as India’s per capita income grows, the trends on premiumisation will also play out across multiple categories, thereby aiding the category growth. We believe, in equities, the key to make money is to invest in businesses with compounding characteristics and remain invested in them as these businesses grow and create wealth for shareholders. The important point to highlight here is to be patient and remain invested, fully knowing that the journey will not be a straight line, there would be bad quarters in between on account of temporary business challenges.

Today, when we look at stocks that have been multi-baggers for us in our portfolio, almost all of them have the common characteristics like competent management, strong balance sheet, efficient use of capital, widening moats and long runway for growth. There were periods of underperformances in these stocks, however, our willingness to live through temporary disruptions have paid off for our investors.

Hence, I would once again like to highlight that the way to create wealth in equities is by focusing on right kind of businesses and remaining invested in them and not by investing on the basis of second guessing the market’s next move.

In a very simplistic way investing is nothing else but buying businesses below their intrinsic value and selling them when they start quoting significantly above their intrinsic value. One can have different approaches to assess the intrinsic value of a business. Further, the perception of value would also differ from investor to investor. In our investment process, we do not follow a very straight jacketed approach for assessing the intrinsic value of a business. We believe, by relying on single or too simplistic parameters like multiples to next year’s earnings, one may end up significantly underestimating what the business can deliver over a long period of time. Hence, multiples should be seen from the lens of quality and sustainability of earnings.

In the end, I would like to emphasise again that investing on the basis of second guessing market’s next move, chasing next big theme, reacting to shorter term performances of stocks/funds are all impediments to longer term wealth creation in the market. Invest keeping in mind your risk profile and follow right asset allocation to make the most from your investments.

Tata Mid Cap Growth Fund

(An open ended equity scheme predominantly investing in mid cap stocks)

Risk O Meter

Disclaimer: The views expressed in this article are personal in nature and in is no way trying to predict the markets or to time them. The views expressed are for information purpose only and do not construe to be any investment, legal or taxation advice. Any action taken by you on the basis of the information contained herein is your responsibility alone and Tata Asset Management will not be liable in any manner for the consequences of such action taken by you. Please consult your Financial/Investment Adviser before investing. The views expressed in this article may not reflect in the scheme portfolios of Tata Mutual Fund.

Mutual Fund investments are subject to market risks, read all scheme related documents carefully.

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