Devender Singhal of KMAMC says equity investment is a good tool for long-term capital appreciation.

Devender Singhal, fund manager at Kotak Mahindra Asset Management, said equity investing has been a big source of long-term profits over the past few years.

In an interviewMint GenieSinghal said stock investing always carries a high degree of risk and associated volatility, and the Special Opportunities Fund is no exception.

Edited excerpt:

With markets heating up and experts urging investors to be wary of the hype, is now the right time to look for exceptional investment opportunities?

The current valuation multiples in the market are at unattractive levels, especially in mid and small caps where the valuation premium is above the long term average. We do not see a case for multiples to expand over the next few years (especially in mid and small caps). In this scenario, alpha generation will come with a unique opportunity where we see both cases of accelerating earnings growth and an expanding range of valuation multiples. This fund seeks to invest in these very special opportunities. So, yes, we think now is the right time for such a fund.

You will be managing a “Special Opportunities Fund” – what is special opportunity to you?

Special opportunities can come in all forms – (a) policy changes in India and abroad, (b) mergers and acquisitions, (c) demergers, (d) management changes etc. Additionally, there are also opportunities to look at conversion of operating leverage into financial leverage, industry consolidation, share buybacks etc. Hence, the canvas to look for such opportunities across the market is quite wide.

What type of investor is best suited for Special Opportunities Funds? Are there particular financial goals or risk tolerances that make these funds particularly suitable?

Equity investing always involves high risk and associated volatility, and this fund is no exception. However, its focus on bottom-up stock selection favors a disproportionate risk-reward scenario.

The latest AMFI data has revealed that investors are moving headfirst into thematic funds. What are your thoughts on this?

Thematic funds generally have a targeted approach to a particular sector or theme, and are therefore used as a seasoning to overall equity exposure when an investor wants to invest in a particular theme over others. When used actively, these funds can add potential alpha to a client’s portfolio returns.

More and more investors are moving into equity investing. What advice would you give to them?

Equity investment is a great avenue for long term capital appreciation. Over the years, equity investment has been a great source of long term profits. It also ensures that your funds are used more productively for the growth of your country and you will also earn profits in the long run.

What people see in stock investment is the return. What they tend to overlook is the invisible “risk.”

In the market, it is important to always have a view on both risk and return and move forward. Often, investors focus only on the return part and make mistakes. Moreover, it is always a good idea to seek professional advice when investing in the stock market. Remember, there is no such thing as a “free lunch.”

Is there any reason to think that the return of the current administration will encourage investors to focus on stocks and ignore the importance of bonds?

A growth-oriented and stable government is what all investors want. Therefore, the return of the current government has once again awakened investors’ expectations for the continuation and acceleration of policy reforms in the coming years. Also, since the government took office, capital inflows into the stock market have increased. However, it would be wrong to say that investors are ignoring fixed income instruments, as deposits have also increased. Therefore, investors are keeping an eye on both asset classes, although there is a bit more noise around equity investments in the current situation.

For investors who are looking to build a chunk of their wealth over a long period of time, say 20-25 years, what would you advise their allocation to equities should be?

Investors who do not require their money for the next 20-25 years should allocate a significant amount to equities. This will definitely help you save for your future needs. However, there is no one-size-fits-all rule. It all depends on your cash flows and risk profile.