Betting on banking and healthcare sectors for steady growth, says Chintan Haria of ICICI Prudential

The investment climate has toughened in the last few weeks, with Israel-Hamas conflict adding to tough geopolitical conditions. On the other hand, domestic investors are upbeat, with record mutual fund SIP accounts hitting an all-time high in September. Chintan Haria, head of investment strategy at ICICI Prudential AMC tells Business Insider India about the themes that hold potential for investors, instruments that offer stability in tough times and more.

In the recent past, returns from large cap funds have been lower compared to mid and small caps. Should investors still consider having large caps as a core portion of their portfolio?

Large caps have a specific function in a portfolio. A large cap offering will consist of names which are some of the most established businesses in their respective industry. These businesses will have stronger corporate governance principles, a strong financial sheet, and a solid business model. Due to their inherent stability and lower volatility, large caps can produce consistent returns with relatively less volatility. Therefore, large caps should not be looked over when putting together a portfolio. For this exposure, investors can consider investing in a large cap oriented passive offering such as an index fund or an ETF (exchange traded fund). Since these offerings replicate an underlying index, the expenses associated are minimal.

What is the best time to invest in sectoral or thematic funds? What are the sectors and themes that hold good potential in the times to come?

When investing in sectoral/thematic funds, be it through index funds or ETFs, investors may have extreme experiences. If one invests at a time when the economy favours the underlying stocks, these index funds or ETFs can deliver outsized returns and vice versa.

Going forward, we believe as the economy grows, the banking sector holds growth potential. Similarly, another interesting theme is that of healthcare. As income rises, the general spending on healthcare also increases along with increased awareness makes the health-related theme a structural story in the long term.

For a longtime the banking sector was considered to be a cyclical sector that used to move with the crests and troughs of economic growth. However, over the last few years, private banks have largely de-risked their business models.

Can bank ETFs be considered relatively safe cyclical bets in India?

Banks today are in good health thanks to measures such as Insolvency and Bankruptcy Code. Also, the NPA cycle is behind us and post the consolidation of the banking industry, a significant share of banking is with the bigger banks. Hence, the sector is much stronger and less cyclical today but it will continue to be impacted by the country’s economic cycles. Subsidiaries such as insurance, broking, asset management companies, form a significant part of large bank’s portfolio value, providing them with relative strength.

The Gaza conflict has been intensifying and it has spooked investors. What is the best place to park money in such a scenario?

Given that geopolitical unrest has the potential to exacerbate economic volatility and instability, investors often choose safe haven asset classes like gold during these periods. Gold serves as a hedge in these kinds of situations, providing investors with easy access to a safe and liquid asset that they can quickly convert into cash when needed. Gold is immune to depreciation brought on by inflation or uncertain political conditions, unlike paper money.

Gold exhibits a low correlation with other financial instruments such as bonds and equities, rendering it a valuable tool for portfolio diversification and risk mitigation. In the current environment, gold is an appealing asset class because of all these qualities. Some of the other catalysts for a rally in gold prices could be an increase in inflation across global economies as a result of rising oil costs. This holds the potential to trigger another round of rate increases, along with the ongoing quantitative tightening implemented by central banks around the world.

Is there a way to build a balanced portfolio using only passive offerings?If so, what is the right way to go about it?

The starting point for building a portfolio is deciding on asset allocation. Here, if one is unsure how to proceed, they can seek the help of a financial advisor. For equity exposure, an investor can choose from a wide range of offerings which can be either market capitalization based, smart beta/factor based, sectoral or thematic in nature. For debt allocation, investors can use liquid ETF as a holding fund or for short term allocation and can consider 5-year or 10-year GSec ETF for long term debt allocation. When it comes to commodity exposure, investors today have the option of investing in gold and silver ETF.

Factor investing has been gaining ground. Can you elaborate on how it works?

Smart beta ETFs, also referred to as factor-based ETFs or factor investing, is a rule-based investment strategy that combines the benefits of both passive and active management to offer superior risk-adjusted returns. In this case, the investing philosophy stays passive because the fund manager makes decisions by tracking an index that is predicated on a set of sacrosanct rules.

However, the investment style becomes rule-based because the fund manager targets particular variables, making it active. Here, making investment decisions is devoid of human bias because the entire process is rule-based. Momentum is one of the factors within the factor investing universe.