Tips for new investors: Temper expectations from small, mid-caps; invest with 3-5 yr horizon

Edited excerpts:

The equity market has witnessed a spell of severe volatility over the last few trading sessions. Is this merely a passing phase driven by global volatility or are stretched valuations playing a part?
Volatility in global markets has triggered some of the corrections we see in domestic markets. Indian equity indices, both large and midcap, were trading above their one standard deviation from their longer-term average towards the beginning of 2022. Hence, some amount of mean reversion was always possible. The next phase of the rally would be primarily driven by the trajectory of earnings recovery, even as the valuations may continue to correct.

How have the UTI mid-cap and small-cap funds performed in the calendar year 2021? What is your outlook for the current year? Is it the time to invest in small or mid-cap funds?
Midcap and Smallcap indices have significantly outperformed their larger cap peers in 2021. The outperformance has covered some of the longer-term underperformance that we had seen in the small/mid-cap indices versus the large cap index. UTI funds have also benefited from the overall trends seen in the broader market. After the stellar move in the small/midcap indices, one needs to temper down the expectation of return. The returns from here would be driven by earnings recovery, even as the valuation may mean revert. Any new investor who comes in should invest in the market from a longer-term perspective of 3-5 years. During this period, one can see the benefit of earnings compounding reflecting in investment compounding.

Benchmark indices delivered stellar returns in 2021, but the Bull Run was interspersed with episodes of marked volatility. What would your advice be for retail investors? Where is the value and how should one navigate a choppy market?
Any investor coming into the market should first and foremost have a long-term time horizon. We have seen empirically that over ten years, none of the indices (here referring to Nifty100 , Midcap 150 and Small-cap 250) have given a negative return on a 10-year rolling basis. Moreover, the Nifty 100, Nifty Midcap 150 and Nifty Small cap 250 have given a return of over 8% (CAGR) on a ten year rolling basis 95%, 99% and 85% of times, respectively in each segment. Hence, as long as the holding horizon of investors is long enough and they go in for SIP way of investing, the near term market movements should not matter in the longer term.

To what extent has the environment of low interest rates maintained by RBI over the past couple years helped small and mid-cap companies in terms of cost of capital? Now that the easing cycle is over and there is a likelihood of policy being tightened this year, how much of an impact would that have?
Our continuous focus has been on finding companies with a long growth runway or which have turnaround / transformational possibilities. This portfolio selection enables us to build a core that compounds over time and is complemented by opportunities that have possible mean reversion playing out. Hence, it allows us to be more bottom-up in our assessment and not worry too much about macro. Within the mid and small-cap space, we invest in companies that are like largecap isotopes. Largecap isotopes are those mid and smallcap companies that have the same characteristics as their larger cap peers and are the leaders in the space they operate in. Hence, these mid/smallcap companies enjoy similar benefits as far as access and cost of capital are concerned like their largecap peers.

Therefore, while the capital costs might go up for the market, it should not disproportionately impact the midcap companies within our holding.

How would you rate corporate India’s October-December earnings scorecard so far? The corporate sector bounced back strongly after the first shock of the pandemic, but are we seeing a secular trend of higher revenue streams?
The corporate results have seen a mixed trend so far. We have seen many companies getting impacted owing to raw material prices seeing a significant spike or supply chain issues leading to disruptions and unnecessary overheads. Some sectors severely hit during Covid times witnessed a revival in an essentially normal December quarter. Some of the trends observed during the past few quarters related to higher digitisation, shift from unorganized to organized segment, shift of global supply chains to India, higher focus on green energy, higher ecommerce penetration, higher global tech spends continue to remain strong and structural.