Why A Slowdown in GDP Matters To You As An Investor?
Jun 27, 2019

Author: PersonalFN Content & Research Team

(Image source: Image by kai kalhh from Pixabay)

As you might be aware, India has lost its world's fastest growing economy spot to China in Q4, FY19. In the January-March quarter of the last fiscal, the Indian economy grew at a mere 5.8% as against China's 6.4% growth. It seems India's GDP growth has been on the downward spiral. Indian economy expanded at 8.2% in Q1, FY19, 7.1% in Q2, FY19 and 6.6% in Q3, FY19.

Mr Subhash Garg, Finance Secretary, blames the slow growth on the NBFC crisis- Slowdown in the fourth quarter... was due to temporary factors like stress in nonbanking financial company (NBFC) sector affecting consumption finance.

In the second bi-monthly monetary policy of FY 2019-20, RBI slashed estimated GDP growth to 7.0% from 7.2% made earlier. It had citied reasons such as a slack in investment activity, dampened exports, and softening of rural consumption demand for the downward revision. On the positive side, it expects some pick-up in the investment activity thanks to political stability, increased capacity utilization across sector, and improvement in the business expectations, among others.

Nonetheless, International Monetary Fund (IMF) expects India's GDP to be slightly better at 7.3% in FY20 and 7.5% in the next fiscal.

Since GDP growth affects corporate profits, tracking GDP trends is crucial for investors. Speaking about GDP growth in the Indian context, it seems the infrastructure push of Modi 1.0 hasn't been enough to attract new investments in India.

But, you have to be extremely careful if you are looking at today's GDP and investing (or not investing in the markets).

Despite a slowdown and moderate expectations about future growth, leading stock market indices such as BSE Sensex and CNX Nifty 50 are hovering around their all-time high levels. It seems the markets are hoping against hope that growth will pick up in the coming quarters.

Slowing economic growth is a vicious circle. Slower growth leads to fewer jobs and fewer jobs cause a further slowdown in the consumption growth. According to the National Sample Survey Office (NSSO), Country's unemployment rate spiked to 6.1%-a 45 year high in 2017-18. Experts believe, India needs to push its GDP growth to 10% and shall maintain the same pace thereafter for several years for its masses to see substantial upliftment in their standard of living.

But please remember, GDP is a lagging indicator, i.e. it doesn't foretell anything about future growth. Hence, you shouldn't speculate about future GDP and invest in equities and equity mutual funds. Instead, you will be ready to face uncertainties.

Now you might be wondering which way to go...

Economic growth trends might make markets volatile, thereby presenting lucrative investing opportunities for the short term as well as the long term. You can get the best of both worlds, that is, short-term high-rewarding opportunities and long-term steady-return investing, if you followed Core and Satellite strategy.

"Core" applies to the more stable, long-term holdings of the portfolio; while the term "satellite" applies to the strategic portion that would help push up the overall returns of the portfolio, across market conditions.

Below are the benefits of following the 'Core and Satellite' approach:

  1. Facilitates optimal diversification;

  2. Reduces the risk to your portfolio;

  3. Enables you to benefit from a variety of investment strategies;

  4. Aims to create wealth, cushioning the downside;

  5. Offers the potential to outperform the market; and

  6. Reduces the need to constantly churn your portfolio

The 'Core and satellite' investing is a time-tested strategic way to structure and/or restructure your investment portfolio.

As far as your mutual fund investments are concerned, the 'core portfolio' should consist of large-cap,multi-cap, and value-style funds, while the 'satellite portfolio' should include funds from the mid-and-small cap category and opportunities funds.

PersonalFN's research states that 60% of the portfolio should be reserved for Core mutual funds, and the balance 40% for the Satellite mutual funds.

But what matters the most is the art of cleverly structuring the portfolio by assigning weightages to each category of mutual funds and the schemes picked for the portfolio.

Moreover, with changes in market outlook, the allocation to each of the schemes, especially in the satellite portfolio, needs to change.

Please remember...

Constructing a portfolio with a stable core of long-term investments, balanced by a periphery of more short-term, satellite holdings can help tactically allocate the investible surplus and offer the potential to outperform the markets.

In this way, the satellite portfolio supports the core by taking active calls based on extensive research.

Now let's look at what goes into creating a strategic portfolio -

  • The selected funds should be amongst the top scorers in their respective categories. The portfolio should be built with a time horizon of at least five years

  • It should be diversified across investment style and fund management

  • Each fund should be true to its investment style and mandate

  • They should be managed by experienced and competent fund managers and belong to fund houses that have well-defined investment systems and processes in place

  • Each fund should have seen at least three market cycles of outperformance 

  • The portfolio should contain an adequate number of schemes in the right proportion. In short, it should carry the most optimum allocation to each scheme and investment style

  • The number of funds in the portfolio should not exceed six or seven

  • No two schemes should be managed by the same fund manager

  • Not more than two schemes from the same fund house should be included in the portfolio

Core and Satellite portfolio can weather adverse GDP growth phases and help accelerate returns when the GDP is rising.

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