Investors should use these corrections to allocate more funds towards those stocks which they were not able to buy (or buy enough) earlier due to high valuations, says Amit Nigam, Head, Equities, Peerless MF, in an exclusive interview with Kshitij Anand of EconomicTimes.com. ET.Com: Indian market witnessed another round of panic selling last Tuesday. What is your own sense on how much the market could fall from here? Amit Nigam: We do not focus at market trends and have a complete bottom-up approach. We look at a company’s business model, management bandwidth and integrity, along with earnings trajectory (hence valuations) while investing. We are also cognizant of the fact that investments in companies do not happen in isolation, and for that purpose alone, we “monitor” the markets. Over the last 6 months, Indian stock markets (Nifty) has corrected by about 15-16% due to multiple worries like possible Fed rate hike, below-par monsoons, and slowing down of the economy. To us, the most relevant attributable reason is the cut in earnings growth for Indian corporates – post dismal performance over the previous 3 quarters – the earnings growth for current financial year has been downgraded by 6-7%. Hence, after the recent correction, we believe the valuations have become more sanguine and probability of large downsides to markets should be low. ET.Com: What should be the ideal portfolio strategy for long-term investors? Is it time to reshuffle their portfolio or stay put as volatility spikes? Amit Nigam: Studies reveal that equity, as an asset class, has not only delivered handsome returns over reasonably long periods of time, but also has the potential of beating inflation by a substantial margin. However, with these attractive return possibilities of equities comes an elevated level of volatility. It is true that the impact of volatility wears down over time, but it is equally true that the short- term impact of volatility can cause serious concerns in the minds of even the most long-term investor. Having said that, we think corrections in equity markets are an opportunity to buy a company, the business of which we like, at cheaper valuations. We believe that investors should use these corrections to allocate more money towards those companies which they were not able to buy (or buy enough) earlier due to high valuations. Strength of business: Investors should focus on the strength of the business in which a company operates – the business should earn returns which are enough to cover for its cost of capital. Only then are investments in such companies capable of generating wealth over long term. Management Team: If these companies are run by a team of management which is sensitive to the interests of the minority shareholders, then the journey of wealth creation becomes easier. This thought process is driven by the fact that when we buy stocks, the reality is we buy part ownership in a particular business and hence we, as minority shareholders, would achieve our goals when the interests of both the business and the management are aligned to those of ours. Buy on Dips: In fact, investing in such business franchises gives confidence to investors to be bold enough to use short-term volatilities to increase their allocations towards equities, because to us, in the long term, the biggest risk investors run is of being under-invested in equities. ET.Com: Recent comments made by Fed Vice Chairman Stanley Fischer spooked markets to certain extent on a possible rate hike which could well come in September. Do you think Fed would raise rates this month? Amit Nigam: US Fed has been guiding markets for the first interest rate hike (after almost 7 years) sometime this year. The date of the event has only been postponed as data from US has remained a mixed bag and commodities collapse has kept inflation fears at bay. However, when the Fed decides to increase the rates, our markets may have to bear the fallout in terms of capital re-allocation which global investors may decide to undertake. Post the 15-16% correction over the previous 6 months, the valuations have softened and hence a possibility of a further big correction seems unlikely. ET.Com: FIIs have pulled out more than Rs 17000 crore in August, but DIIs have been supporting markets. Do you think the trend is likely to continue in near future as well? Amit Nigam: Investments made by DIIs represent Indian retail investors’ participation in equity markets. The Indian retail investor has been historically underinvested in equities as an asset class and more so during the previous 5 years. This was a period marked by high inflation (especially CPI), implying negative real rate of interest (nominal interest rate less inflation), when investors preferred hard assets like gold and real estate. However, over the previous year, as inflation has cooled off and real interest rates have moved into the positive territory, we have seen Indian retail investors return to financial products. We believe current moderation in commodities and fairly normal monsoons would keep inflation in benign territory over the next 12-18 months and in such a scenario, financial products including equity would be an asset class of choice.