Why Iifl’s Karan Bhagat has reduced his equity exposure
Karan Bhagat, Founder, Managing Director and CEO, IIFL Wealth & Asset Management, is very aware of price-earnings and price-to-book multiples when it comes to equity in his investment portfolio. “Whenever the price-to-earnings (P/E) ratio is above 20-21 and the price-to-book (P/B) ratio is above 3.6-3.7, I reduce my equity allocation at 30-25%,” he said.
For this reason, when markets rose during covid, Bhagat limited his equity exposure to 20-40%. “My equity allocation is structured around three tranches: 30-35% in the overvalued zone; 70% in the fair zone; and 100% in the undervalued area. The only challenge is that this is easier said than done as markets can stay in overvalued areas for an extended period of time. For example, the markets have been overvalued for the past two years and it is important to have the patience to stay away in such a situation,” Bhagat said during an interaction with Mint as part of the Guru Portfolio series.
In this series, leaders in the financial services industry explain how they manage their own money.
The fairly valued stock zone for Bhagat is when Nifty 50 is between 14,000 and 16,000. now.”
While staying firmly out of the markets for the past two years has given Bhagat the opportunity to enter the markets at a reasonable valuation, he admitted the strategy has also had its share of downsides.
“If I were to look back over the past 24 months, I think one strategy that didn’t work for me was the reduction in equity allocation even as Nifty climbed to 15,000-16,000 and continued to break above 18 500. It might have worked if I had entered at around 15,000 and sold at 18,000. But that, more often than not, doesn’t happen,” he said.
Its debt portfolio is largely comprised of liquid funds and very short-term funds, as it does not view debt as a long-term investment. He finds real estate investment trusts (REITs) a good borrowing product.
“REITs have two big advantages for me: first, they are not subject to tax, so I effectively get an after-tax return of 5-5.75% and second, they allow me to participate in real estate business without the challenges of rental.” SIRs are tax exempt in the hands of the investor if the SIR has not opted for a favorable corporate tax rate for itself.
When asked how Bhagat involved his wife in the family finances, he replied that his wife Shilpa was shrewd when it came to money management and they collectively took an hour every month to watch their finance.
“She helps me with broader investment decisions, but more importantly, she is actively involved in our succession discussions and ensures that all appointments and second holdings are in place.”
The couple also make a point of actively educating their 12-year-old twins about the concept of money and the comforts and inconveniences that come with it. “It’s very important because they grow up in a very different environment from the modest backgrounds we come from,” he said.