Listen to this article
What’s your outlook on equity markets in 2023?
While the Indian markets have sharply outperformed its peers on a relative basis (on a one-year and three-year basis), on an absolute basis, CY2022 was primarily a year of consolidation after a strong CY21. Such sharp outperformance has widened the gap between the valuations of India versus its emerging market peers and now India trades at a significant premium to them. Nonetheless, Indian markets held on their own in turbulent times of high interest rates, inflation and geopolitical issues thanks to healthy earnings growth and good management of macro parameters. We don’t expect the premium to further widen from hereon but the premium can continue if corporate earnings grow at a decent clip. Nifty has seen seven consecutive calendar years of gains (CAGR of 12.4%) and given sharp outperformance of India, one should be prepared for moderate returns in the near term. We expect stock picking and sector allocation to be prime driver of returns
Equity markets largely remained flat last year with events of heightened volatility and all-time high numbers. There are concerns around valuation. How comfortable are you with respect to valuation of the market?
Our benchmark indices valuations at ~18-19x 1 year forward earnings are not cheap but also reflective of macroeconomic stability, relatively resilient EPS growth and a conducive flow environment. With some correction seen in recent times, we are nearer to the longer term averages. As long as earnings growth is healthy and valuations are not too far from long term averages, we can expect healthy performance from the markets as well. We expect manufacturing push, improving credit growth and rural recovery to provide legs to the economy and earnings growth.
ELSS is by far one of the best tax savings options for investors. However, many Indians are yet to invest in ELSS. How can the industry make ELSS popular among people?
The equity culture has slowly spread in India via the mutual fund route and financialization of savings is happening which is reflected by the monthly SIP numbers and overall industry growth, however; it is quite disconcerting to see a category like ELSS not participate in the same way. We truly believe ELSS is a great product not only because it offers a great combination of wealth creation opportunities, tax saving but it also takes care of investor behaviour by virtue of the 3-year lock-in, which ensures investors get a good experience by staying invested over the long term and not withdraw in between due to market volatility in the short term.
ELSS funds can be made more popular by creating awareness about these three aspects and comparing this with the other options available for Indian savers, wherein tax saving products are dominated by fixed income products. The ELSS category has grown at CAGR of 3.50% for last 1 year & 15.67% for last 3 years as on December 30, 2022. Industry has already done the hard work over the years to promote this category, however, a focus on some of the key messages in a consistent manner can help further.
One of the most common beliefs among investors is that ELSS is just for tax saving and hence, they usually invest only up to Rs.1.50 lakh in these funds. How can MFDs encourage their clients to allocate more investments to ELSS?
Investors generally invest in ELSS for tax savings around end of every financial year, but investors should be made aware of its additional benefits throughout the year. ELSS has a lock-in period of 3 years relative to other tax saving options which have a minimum lock-in period of 5 years at least, thus providing additional flexibility and it may provide potentially higher returns, since the same is an equity-oriented product unlike traditional debt-oriented product. Also, the investment may not necessarily be a lumpsum investment but the investors can choose to go with the monthly SIP option which allows investing at periodic intervals. This will help investors execute one’s tax planning in an organized manner and not rush during the March end, which can lead to wrong decision making as well. Overall, MFDs can possibly pitch ELSS as a core part of the investor’s portfolio, where a long-term SIP can be recommended, depending on their life goals. This can ensure a good experience for the client, which over time can lead to greater acceptability.
Talking about PGIM India ELSS Tax Saver Fund, what is the investment strategy followed? How do you mitigate risks?
PGIM as a fund house as well as PGIM India ELSS Tax Saver Fund follows the Growth At Reasonable Price (GARP) strategy for investing in equities. This strategy is a middle path between value and growth investing, offering the benefits of both the investment styles and is best suited for wealth creation in growing yet volatile market like India in our opinion. We invest across market capitalisations with a bias towards large caps with a reasonable allocation to high conviction and differentiated mid and small caps where in there is possibility of superior growth and valuations are reasonable. The fund’s investment strategy is to construct a portfolio with a long-term horizon, comprising companies that have strong fundamentals and scalable business models available at reasonable valuations. We prefer companies which have respect for capital, low leverage, ability to consistently generate positive operating cash flows, good corporate governance standards and run by sound management. Visibility of earnings growth and reasonable valuations at the time of entry are critical while constructing the portfolio and provide a margin of safety thereby lowering downside risk. The fund reduces the risk by following internal sector and stock limits and by being mindful of the valuations.
The fund has outperformed the benchmark index. What are the key factors that resulted in this outperformance?
The PGIM India ELSS Tax Saver Fund has outperformed the respective benchmark (Nifty NSE 500 Index) over the last one, two and three years as of December 31, 2022. Our strong in-house research and processes have been able to identify relevant themes and emerging trends in a timely manner and we have been nimble enough to act on them and this has been a key driver of performance. Further, our processes and investment framework also help in avoiding mistakes and we avoided most of the highly valued companies and IPOs as well, which were the “flavour of the season” at one point. Similarly, in the early part of last three years, we were able to spot weakness in financials as well as strong currents in IT which are large index weights while more recently we have been underweight in IT and overweight in financials which have helped performance. Hence, active management and in-house research identifying changing dynamics have helped the fund in stock selection and outperform the benchmark.
How do you position PGIM India ELSS Tax Saver Fund in the market as against other ELSS funds? What gives it a competitive edge?
The PGIM India ELSS Tax Saver Fund runs a relatively focused portfolio with a bias towards large caps but also invests in differentiated names in mid and small cap space which may not be popular today but can see a turnaround in next 2-3 years. What sets us apart is our agile and active approach and research backed ideation process which spots fundamental trends for investments.
