The volatility in the Indian equity market is making investors jittery about returns. But those who stick to their long-term goals will emerge victorious. In an interview with Outlook Money, Neelesh Surana, chief investment officer, of Mirae Asset Investment Managers (India), advises systematic investments to beat the blues in the medium term, and cater to long-term goals, such as retirement. Neelesh Surana also spoke about the sectors he is optimistic about and the ones that need a cautious approach.

The equity market is currently experiencing a turbulent phase. What will be the outlook in the medium to long term?

The Indian equity market has displayed resilience despite adverse global macroeconomic conditions, such as high-interest rates and surging crude oil prices.

In the face of these global challenges, the Indian economy and earnings growth are expected to remain reasonably resilient. This is due to increased investment in housing, strong balance sheets, new service, and manufacturing export opportunities, mean revision in the rural economy, and the positive impact of a more formalized economy.

We expect interest rates in India to soften over the next year, given likely comfortable inflation, which should support the equity market. Additionally, inflows into equity mutual funds remain steady and reliable. Overall, we maintain a constructive outlook on the market and advise investors to maintain a 3-5-year investment horizon, stagger investments through systematic investment plans (SIPs), and keep long-term return expectations modest at around 12-15 percent.

In terms of valuations, the mid-and small-cap spaces appear to be overvalued compared to historical levels. What is your investment strategy?

Some small-cap stocks have shown signs of overvaluation, especially those that have seen significant increases from their March 2023 lows. Our existing portfolios are slightly more tilted towards large-caps and larger mid-caps.

You recently increased the SIP limit in the Emerging Blue-Chip Fund from 2,500 to 25,000. Do you anticipate growing opportunities in mid-cap?

The increase in the SIP limit to 25,000 is in response to the evolving landscape and the growing relevance of mid-cap companies. The market capitalization of the Nifty Midcap 150 index has doubled in the last three years, and profitability has also grown by 2.3 times. Market liquidity for mid-cap companies has increased and the companies have become bigger and more diversified. Also, many mid-sized companies now lead in their respective sectors. The increase in limit is also in response to investor feedback.

Some equity-oriented fund houses are sitting on higher cash. What is your strategy?

We have refrained from making aggressive cash calls over our 15-year history for two reasons. First, our long-term approach consistently provides investment opportunities that outweigh the benefits of holding cash. Second, we compare ourselves to benchmark indices, which do not make cash calls.

Given the evolving geopolitical situation, have you made any changes in your investment strategy?

We assess businesses across multiple factors. Currently, geopolitical issues are contributing to elevated oil prices. Typically, we only consider corrective actions if these developments significantly impact our long-term assumptions. In our view, well-selected and well-managed companies can navigate these variables and still deliver long-term earnings growth.

Which sectors do you think offer opportunities? What are your thoughts on the Banking, Financial Services, and Insurance (BFSI) sector?

We are optimistic about opportunities in sectors that are poised to benefit from a broader domestic economic recovery. The cyclical upturn is still unfolding in the banking, telecom, and rural consumption sectors. The current economic landscape is favorable for banks due to robust corporate and bank balance sheets. We also like many sub-segments within consumer discretionary sectors, driven by favorable demographics and per capita metrics, which may lead to increased discretionary spending. Among exporters, we favor businesses where Indian companies possess competitive advantages, such as healthcare and specialty chemicals.

Which sectors are you cautious about currently?

We are underweight in the IT and industrial sectors. Our approach to the IT sector is dynamic as we need to assess the impact of global rate hikes on the overall demand outlook. As for the industrial sector, while growth prospects for capital expenditures are promising, we maintain a cautious stance due to already reflected valuations.

We have seen a strong rally in the healthcare sector from May 2023 onwards. Will this continue amid global challenges?

The healthcare sector is expected to perform well amid the ongoing macroeconomic uncertainty. In the long term, it benefits from demographic factors and increased healthcare spending in India. Also, India is poised to become a preferred hub for the manufacturing of pharma products. This sector is reasonably valued with steady upside potential.

What role does equity play in retirement planning? What should be the investment approach?

Equity mutual funds are excellent for long-term financial goals and retirement planning. They offer transparency, competitiveness in returns and costs, and benefits from professional fund management. Investors should allocate money not needed in the medium term (say, three years), and systematically invest in equities for the long term, taking advantage of compounding benefits over time.