Only Two Index Funds—Nifty And Mid Or Small-Cap Funds—Required In A Portfolio, Says Manish Chokhani

Most individuals only need two index funds in their portfolios—one for Nifty and another for small or mid-cap stocks, said Manish Chokhani, Director of Enam Holdings.

In a discussion on NDTV Profit's televised interview 'Diwali Masters', Chokhani shared insights into the current investment landscape, particularly for young Indian investors. With a significant portion of the Indian populace under 40—69%, Chokhani stressed the importance of prioritising business development over mere stock market speculation.

Chokhani's primary takeaway for investors was straightforward: "The real way to wealth for all these guys is to go and build business, not just make money in the market and certainly not be doing F&O." He added that one thing that he hates to tell the wealth management industry is that "people only need two index funds in their portfolio, one Nifty fund and one small or mid-cap fund and one fixed income fund and that is good enough."

He argued that this simplicity allows investors to focus on their long-term financial goals without getting lost in the complexities of stock picking or trading. "If you can't dedicate yourself full-time to investing, don't waste time trying to pick stocks," he advised.

Chokhani also underscored the importance of asset allocation. He suggested that "if you are a 30 year old, 70% can be equity, 30% would be fixed income for stability and cash flow during market drawdowns." This allocation can provide resilience, especially in challenging market conditions, he explained.

Reflecting on recent market trends, Chokhani acknowledged that the environment has shifted since 2020, when buying stocks at any price was a successful strategy. Today, however, he noted a more discerning market, where companies priced based on perception face significant backlash when their financial results fall short. He emphasised that this change marks a new regime in investing, necessitating a more cautious approach.

Chokhani observed that many investors have not experienced a market drawdown in the past eight years, making them vulnerable to sudden fluctuations. He recommended positioning oneself appropriately, especially considering that small and mid-cap stocks can dramatically alter the composition of a portfolio. "I think we should be happy, tread some water for a while and let the earnings catch up."

India's Economic Potential

Chokhani expressed optimism about India's long-term economic trajectory. He highlighted the country's consistent "GDP growth over the past 30-35 years, currently averaging 11-12% nominal growth". As the economy formalises, Chokhani noted that larger, more competitive companies are capturing a greater share of profits across various sectors.

He elaborated on how the top five companies in many sectors typically take home 75% of the profits. This consolidation indicates a wealth of investment opportunities as India continues to grow. With a robust pipeline of sectors ripe for investment, he believes the potential for compounding growth remains high.

Earnings As The Market's Master

Chokhani emphasised the importance of focusing on earnings rather than getting caught up in market hype. He stated, "Follow the master, not the dog," asserting that the true leader of the market is its earnings. As long as companies maintain double-digit growth—closer to 15%—markets are likely to follow suit. However, he cautioned that investors must reset their expectations, noting that the extraordinary returns witnessed in the past few years may not be repeated in the immediate future.

Despite acknowledging the challenges posed by current valuations, Chokhani encouraged investors to maintain a long-term view. He pointed out that many investors have become accustomed to exceptional returns and may struggle to adapt to a more tempered growth environment. With significant capital flowing into Indian equities—approximately $50 billion annually—Chokhani believes that this trend will continue to attract foreign direct investment and further enhance market growth. He said, "I am hopeful that a lot of these foreigners who have tasted that India can provide these kinds of returns and this kind of money will only serve to attract a lot more FDI and a lot more foreign investors." He said India right now poses barely 3-4% of global market cap so there is a lot more untapped potential.

Chokhani identified several reforms and initiatives critical for sustaining India's economic momentum over the next decade. He believes that continued government support for the formal economy, coupled with technological advancements, will drive growth. As the demographic dividend comes into play, he sees vast opportunities for wealth creation.