Nilesh Shah’s three rules for investing in a peak market

Stay out of sectors and companies that have too little floating stock and too high a valuation and look for beaten down sectors, says Nilesh Shah, Kotak AMC , in an interview with ET Now.

Edited excerpts:

I am getting a feeler from some channel checks and some distributors that while for equity mutual funds the SIP culture is still intact, the HNI investors have started redeeming, is that true?

It might be fund specific and it might be scheme specific. Broadly if you see the inflow-outflow pattern, we are averaging about Rs 4800 crore in SIP. There will be also flow from EPFO on a regular basis and then there is roughly about Rs 3000-4000 crore worth of lumpsum investment or systematic transfer plan investment.

As of today, we are not really seeing that kind of redemptions from HNIs or from retail or from institutional investors. People have become cautious and they are staggering their investment. If they want to invest 100, they are dividing that in five-six instalments and then putting it in. In fact, we have seen many people across India who redeemed in November and December 2016 post demonetisation when markets corrected and they are all hoping and praying that there will be one day a correction in market and then they will be able to invest.
There is a lot of money waiting on the side and I do not see at Kotak Mutual Fund any redemption pressure from HNIs or retail or institutional investors across our equity funds.

As a fund manager, where are you putting all this fresh money to use? Whatever you are getting in the SIPs, this market is at the peak right now and we all know that opportunities to find new names have almost all been discovered there. Is there any pocket where you think there is scope to put in fresh money into?

The first thing to remember is that this market is at peak in terms of absolute number and not in terms of absolute valuation. There is something called price and there is something called time. What was 31000 index let today will be completely different five years down the line or five years before in terms of price because of the value of time.

The second thing is it is easier to figure out companies which are avoidable so that at least you do not make unintended mistakes. We believe there are certain companies where floating stock is low and that low floating stock is resulting in higher valuation. We are clearly staying out of those stocks and those sectors. Also, there are a couple of sectors where valuations are pricing in exponential growth and our feeling is that while the long-term growth is accurate, the expectation of exponential growth cannot be met every quarter. So, we are trimming our exposure in those sectors and those companies.

Third, we are looking out constantly to figure out companies especially in some of the beaten down sectors where valuations are still reasonable to see if there is any trigger which will unlock the value or which will rerate these companies or sectors.

So, is it a difficult job? The answer is yes, it was not as easy to manage money today like it was in let us say February 2016 when Nifty was 6800. But as a fund manager we are paid for doing difficult jobs and difficulties have increased, we have to work hard to pick up stocks, we have to take care of building portfolios but we believe we still have opportunities in this market provided investors give us time horizon.

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