Gold can rise further if China diverts some of its forex: Nilesh Shah


Nilesh shah, the MD & CEO of Kotak AMC, is quite optimistic about mutual funds in general even durimg these difficult time. In an interaction with Rajesh Bhayani, he says that investors in systematic investment plans, or SIPs, ought to continue investing as the current market volatility represents an opportunity for averaging out the acquisition cost. But he also warns that leverage can be fatal at this moment. Excerpts:


Most financial assets such as mutual funds, equities, debt, currencies and even commodities are falling. Only fixed deposits and small savings have protected capital. What is your view?

There are many debt funds such as overnight funds, liquid funds, ultra short-term bond funds, short-term bond funds, dynamic bond funds, PSU bond funds, and corporate bond funds that have given positive return since the beginning of the Covid-19 crisis. Yes, they could have delivered negative returns for a short period of time, but that is not because we have lost money but because we do mark-to-market based on interest rate movements, which small savings or bank deposits don’t. If you remain invested in mutual funds for the tenure equal to that of FD or small savings, most of the time mutual funds will fare better despite day-to-day volatility.


When do NAVs and equities start improving?


The equity fund NAV is linked to market movement. Equity is for the long term. On February 19 and Feb 20, the return on 12-month SIPs in our mid-cap equity fund ranged from -9 per cent to 26 per cent. When the were low, returns were negative and when were up, returns were pretty good. This is the nature of the market. In the short term, they will be driven by flows, but in the long term, fundamentals prevail and reward the disciplined investor.


Several SIPs have fallen below cost even considering medium-term average NAVs. What would you advise retail investors?


They have to continue their SIPs unless they have a financial emergency. Regular Investment is one way of averaging into the market through its ups and downs. If you don’t buy when the index and valuations are down how will you make money? One has to invest through ups and downs of the market via unless you are doing disciplined asset allocation.


has been the only asset in which investors made money. Should they buy more at this level or exit?


prices have done well when interest rates are low and liquidity is high. moved from about $750 in November 2008 to $1,875 in September 2011 on the back of low interest rates and high liquidity. A similar liquidity and interest rate situation is likely to prevail from here onwards and hence the gold price will be supported. The metal can also see a bigger jump if China decides to diversify part of its forex reserves from USD to gold. There is a nascent but growing movement in the US and the world to seize Chinese assets and use them to settle claims. This low probability but high impact event could push China to buy gold and if that happens, prices can remain elevated for quite some time to come.


The global market remains uncertain with the Covid-19 crisis creating a rift between China and the rest of the world. How will this divide impact various and assets classes?


Covid-19 is a medical crisis that has led to a financial crisis as well. It has no precedents in the past one century. This is a long haul and will significantly impact asset prices. We believe the time taken to discover a medical solution and the extent of fiscal and monetary stimulus will decide how the post-covid-19 recovery takes place. Assuming that a medical solution crops up early and fiscal and monetary stimulus is high, we could see equity and gold prices doing well, while fixed income could see some volatility. This is also the period in which leverage can be fatal. In a worst-case scenario of very low fiscal and monetary stimulus and a long wait for a medical remedy, equity could give up the gains of last fortnight and gold and fixed-income instruments may provide better returns.


Investors must follow a disciplined asset allocation strategy during volatility.


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