In this conversation with Kshitij Anand, Chandan explains why megatrends should form the core of retail investors’ portfolios, the risks of entering too early or too late, and how diversified funds can help capture these long-term opportunities while managing volatility. Edited Excerpts –
Kshitij Anand: But at the same time, we are talking about retail investors. So, let us include that angle as well. So, how should retail participation or retail investors position themselves to take advantage of these megatrends while managing risks as well?
Nimesh Chandan: Retail investors, at least in the recent few years I have seen have actually matured quite a bit. Gone are the days when we would worry if the market is falling, some retail investors will panic and sell and when markets are rallying, retail investors will come and now buy at a higher level.
Actually, the crowd is getting more and more smarter where they are actually using the dips to increase their allocation towards equities. The only temptation that we should resist is looking at shorter term and looking at longer term.
In the longer term, you are not trying to time the market, you are just investing in businesses that will grow faster. As I said, that ultimately if a business does well, the stock price will follow. And for retail investors, megatrends becomes an important foundation or a plank to build a portfolio on.
Megatrends investing becomes the core of the portfolio. You may take tactical bets on certain cycles in metals or some other like highly cyclical sectors, but your core portfolio, something that you would want to hold for a longer term, say 5, 10, 15 years should be a megatrends portfolio.
Here, you have to just keep a watch that those trends are alive. Those companies that have the potential to do well and you have selected, if you have selected the right business and the right management, they will capitalise on that megatrend. There may be some ups and downs within that journey, but then they become opportunities to add to those.So, megatrends should be looked at as a core holding, something that you would want to hold for a longer term. I just extend this argument by one more example. Tell any retail investor, close your eyes and think of a business that you would want to invest for a longer term, say 10 years.I do not need to see what stock somebody has thought of, but I am sure this is a company that people, they think will be a good growth business for a longer term. Megatrends help these businesses grow. So, megatrends act as a foundation or a plank for selecting businesses for a longer term.
Kshitij Anand: I wanted to ask you what are the biggest risk of investing in megatrend, but yes, you did sort of touched upon the risk in your answer as well, but still if somebody has to keep in mind that what are the risks that investors should be watching out for when they are, as you rightly pointed out, build their core portfolio and not the satellite one, but the core portfolio for the megatrend approach.
Nimesh Chandan: So, I will put two major risks that one needs to take care of. So, nothing is without risk and knowing the risk of an investment actually strengthens your investment case, because now you know what to be careful of. And in case a risk fructifies, you need to take a stop loss or get out of it. So, two things one should take care of.
In megatrends investing, the juice of making money lies in the middle stage. There are three stages. When the megatrend is just developing, it is just showing up.
Here, the number of winners or bets will be very few who know that, okay, this is the one that will do well. At the fagend, the megatrend is already played out, it is already priced in.
So, the beautiful part of investing in megatrends is to take that growth phase when the megatrends has recently formed, but it is not completely being discounted by the market, so that is the first part.
Second part is in mega trends investing and it is part of growth investing, where you are betting a lot on the future. So, you are giving valuation for the future.
If, say, for example, in certain themes, people are so excited that they have discounted the five-year cash flows or 10-year cash flows of a company today in the valuation, then you need to be careful about what valuation you are paying.
So, you need to actually be careful that what the crowd has already discounted and what you have pencilled in as the growth rate of that mega trend, they should match.
If the crowd is ahead of you, then it is overpriced. The ideal situation is when crowd does not estimate as much as the growth rate as you do and then that is a good time to invest.
Kshitij Anand: Well, one is that building a stock portfolio and the other one, probably, there are certain investors who might not be very comfortable building a stock portfolio, but they are more, you could say, comfortable with mutual funds or ETFs, but how can mutual funds or ETFs help investors gain diversified exposure to mega trend themes?
Nimesh Chandan: So, there are many ways of doing it. You can directly go into a sectoral or a theme fund when that sector or theme is benefiting from a mega trend or you can keep a diversified portfolio.
However, the one observation I have regarding sectoral funds and thematic funds is that people get excited about a sector or a theme after it has done well for two-three years. So, people typically come in at the top. Now, I am not seeing all investors, but generally you see the AUM somehow of the sector and thematic funds goes up close to the top.
So, where they have already done well and people then try to get out when they see a correction in that trend. Somehow, they try to get out at the bottom. Ideally to make money in megatrends, you should be doing exactly opposite.
You should be investing at the birth of that megatrend and when it is fully discounted, you should be getting out.
So, timing sectoral funds and thematic funds is a bit difficult, but if you have flexicap funds or a multicap funds, which hold this mega trends investing at the heart and those where the fund manager, the experts are actually watching these trends and timing it for you, I think that is a better way to go for it.
Also, if you go in a diversified fund, you have an opportunity to have a small investing in everything that is coming in the future. So, diversified is better, but up to the investors, if they think that they can time the sectors and the thematic funds well themselves, then they can go for it.
Kshitij Anand: Should investors focus on global opportunities or is there a strong case for domestic megatrend investing?
Nimesh Chandan: I am quite bullish on the Indian markets and I think we have a very diverse set of businesses that you can invest in within India and the growth rate of the economy is extremely good, so we are like the top growing major economy, sixth year in a row.
We have a huge corporate sector, diversified corporate sector contributing to the profit pool with high ROEs. So, return on equities of Indian corporates is very good. Debt to equity are lower. However, there may be some themes or some companies that unique bets that you may have, which may be available globally.
So, some diversification for that can be done, but core holding, I believe, the Indian investors in India would benefit from it. So, a small allocation towards international, there is nothing wrong in it, but you study it well, understand it well, and then invest.
(Disclaimer: Recommendations, suggestions, views, and opinions given by experts are their own. These do not represent the views of the Economic Times)