Will Modi 2.0’s New Cabinet Have A Positive Impact On Your Portfolio?
Jun 03, 2019

Author: PersonalFN Content & Research Team

(Image source: unsplash.com)

What holds true for your mutual fund portfolio would perhaps hold true for the government's cabinet portfolio.

  • The core should be solid

  • Selection should be based on merit

  • Performance matters a lot and so does consistency and experience

  • Brand image isn't a guarantee to success

  • A periodic portfolio review is crucial

  • Sometimes portfolio consolidation is extremely important

If you look at the pattern of cabinet portfolio allocation, the Modi government has sent a clear message-continuity in reforms with policy decisions.

Modi 2.0 has reshuffled some roles, but more or less there are the same faces in key departments-except for Mr S Jaishankar and Mr Amit Shah. Surprisingly, Mr Suresh Prabhu and Mr Jayant Sinha couldn't make it to the cabinet of Modi 2.0.

It is true that the government does have an active and important role to play in the country's development and economic growth.

That said, the past experiences about policy paralysis suggest that if the government's performance misfires, there could be a deluge of economic downsides.

Hence, do note that the government's performance, can impact your mutual fund portfolio -positively as well as negatively.

Why not prepare for both the scenarios-good and bad?

Before that, let's see what the choice of ministers implies.

No politics in external relations, but looking for opportunities

Many of you would be surprised to know Mr S Jaishankar, the new External Affairs Minister, isn't an elected minister. However, he has been one of India's most experienced ambassadors to Beijing. He has served as an Indian ambassador to Moscow and Washington DC. Plus, has played an instrumental role in Indo-US nuclear deal.

Mr Jaishankar also served a term as President of India's press secretary. His appointment for the role of Foreign Minister, suggests that Modi 2.0 is keen to improve its diplomatic engagement with the Chinese government and the other nations without hurting the US.

Moreover, it seems that the government wants to convert the antagonistic trade war situation between the US and China, into lucrative economic opportunities for India.

Strong faith in finance

The appointment of Ms Nirmala Sitharaman has raised many eyebrows. However, her academic credentials and her vast experience in different departments ranging from the Ministry of Commerce to Ministry of Defence perhaps cleared her way to the Ministry of Finance.

It's crucial to see how Ms Sitharaman handles one of the toughest roles with her five-year experience as a Member of Parliament.

Will she be able to contain fiscal deficit, inflation and put India on a path to high economic growth without compromising on inclusivity: Sabka Saath, Sabka Vikas ...and also win the Vishwas (trust) and confidence of her fellow colleagues and electorates?

Can she provide a roadmap to tax reforms --further simplification of GST, bring in the Direct Tax Code, reduce corporate tax and ensure a taxpayer-friendly environment?

Further, capital infusion in public sector banks, consolidation of public sector banks, providing for adequate funds for the infrastructure development and facilitate labour and industrial reforms, are some of the key challenges for Ms Sitharaman will need to address.

Doing away with the roadblocks to infrastructure development

Mr Nitin Gadkari has wonderfully cemented his position as the Minister of Road Transport and Highways and the Minister of MSME.

Although even the opposition parties acknowledge his work, he will have to deal with some chronic issues such as land acquisition and lack of private participation in infrastructure development. India has to develop a multi-modal logistics network to compete with global superpowers.

Likewise, Mr Dharmendra Pradhan and Mr Piyush Goyal were the blue-eyed boys in Modi 1.0. Mr Dharmendra Pradhan will now be the in charge of two ministries-Petroleum and Natural Gas and Steel, while Mr Goyal will head the Railway Ministry and the Commerce Ministry.

Moreover, as promised to voters in the election manifesto, Modi 2.0 has created a new ministry-Jal Shakti by merging various ministries handling water issues to improve governance. Water is an important natural resource after all.

Will the new ministry ensure clean water supply to all Indian households? Will Jal Shakti Ministry help India's farm sector become less reliant on the monsoon?

All these developments will be worth tracking.

Can Modi 2.0's dream team reinvigorate growth?

As you might be aware, India grew at 6.8% in FY 2018-19 and retained its place as the world's fastest growing economy. However, this is the slowest pace of annual GDP growth in the last five years.

Rural distress, slowdown in agriculture, manufacturing, weak core sector growth, uneven disbursal of loans, asset quality issues at banks, decline in investments, consumption, sluggish exports, and 45-year high unemployment rate (particularly among the educated lot), are some of the serious issues that the Indian economy is currently grappling with. And this year if the southwest monsoon is sub-normal, which is a possibility due to the El-Nino phenomenon, it could weigh on agriculture growth and the overall economic growth.

Hence, don't expect a quick recovery under Modi 2.0. The government's response to these issues will decide how the economy and capital markets perform. As we have mentioned in our articles/notes even before, the year 2019 is not going to be easy; there could be high volatility and could test the patience of several investors.

That said, if the government deals with key challenges effectively and corporate earnings grow fast, markets might pleasantly surprise investors. Having said that, the global uncertainties will also create an overhang on Indian markets.

How should you position your portfolio?

As the threats and opportunities stand even-steven, the composition of your mutual fund portfolio will decide your investment success.

You can't afford to be too aggressive or too conservative with your choice.

Creating a Core and Satellite portfolio is the answer.

The 'Core and Satellite' investing is a time-tested strategy to build your investment portfolio. For the mutual fund investors, the 'core portfolio' should consist of large-capmulti-cap, and value funds, and the 'satellite portfolio' should include mid-and-small cap funds and opportunities style funds.

Why follow the Core and Satellite approach?

To attain optimal portfolio diversification

To offer greater stability to the portfolio and avoid unnecessary churning

To benefit from the dual investment strategy

To stay away from all market noise without letting your portfolio suffer

To create wealth and curb the downside risk to the portfolio substantially

PersonalFN believes, core holdings should form 60% of your mutual fund portfolio and the rest 40% should consist of satellite holdings.

Weightage of each portfolio constituents in both 'Core' and 'Satellite' categories can make a huge difference in the end.

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

Unless you monitor your holdings and recalibrate the weights as per the market dynamics, especially for the 'Satellite' part of the portfolio, you may not derive the real benefits of the 'Core and Satellite' approach.

Here are the rules for 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 outperformance over at least three market cycles.

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

  • The number of schemes in your portfolio must be limited to seven.

  • Not more than five 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

While the 'Core' part of your portfolio focuses on the stable schemes with a long-term view and the 'Satellite' part revolves around capitalising on short-term opportunities. This unique combination helps you generate superior returns without taking excessive risks.

Creating a mutual fund portfolio following the Core and Satellite strategy isn't impossible for you, but it requires a different level of skill set. Also, you will have to dedicate time to do a thorough analysis.

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