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Why Karan Bhagat of IIFL Wealth Cut His Exposure to Equity

Karan Bhagat, founder, managing director and chief executive officer, IIFL Wealth & Asset Management, is very conscious about price-to-earning and price-to-book multiples when it comes to equity in his investment portfolio. “Whenever the Price earnings ratio (P/E) is beyond 20-21 and price-to-book ratio (P/B) is above 3.6-3.7, I reduce my equity allocation to 30-25%," he said.

For this reason, when the markets rose during covid, Bhagat kept his equity exposure limited to 20-40%. “My equity allocation works out in broadly three buckets: 30-35% in the overvalued zone; 70% in the fairly valued zone; and 100% in the undervalued zone. The only challenge is it’s easier said than done because markets can stay in overvalued zones for a prolonged time. For example, markets were overvalued in the last two years and it’s important to have the patience to stay out in such a situation," Bhagat said during an interaction with Mint as part of Guru Portfolio series.

In this series, leaders in the financial services industry share how they manage their own money.

Fairly valued zone of equities for Bhagat is when Nifty 50 is somewhere between the 14,000 and 16,000 mark. “This is when I’ll increase another 20-25% in equities, which is more or less starting now."

Portfolio strategy

While steadfastly staying out of the markets for the last two years gave Bhagat the opportunity to enter the markets at a reasonable valuation, he confessed that the strategy has also had its share of downsides.

“If I was to look back at the last 24 months, I think one strategy that did not work for me was the reduced equity allocation even as Nifty was moving up at 15,000-16,000 and continued to move over 18,500. It could have worked if I had come in at 15,000 or so and sold at 18,000. But that, more often than not, doesn’t happen," he said.

His debt portfolio largely comprises of liquid funds and ultra-short term funds as he doesn’t look at debt as a long-term investment. He finds real estate investment trusts (Reits) to be a good debt product.

“Reits have two big benefits for me - one, they are not subject to tax so I effectively get 5-5.75% post-tax return and two, they allow me to participate in commercial real estate without the challenges of leasing." Dividends from Reits are free of tax in the hands of the investor if the Reit has not opted for a favourable rate of corporate tax for itself.

Family finances

On being asked how Bhagat involves his spouse in the family’s finances, he said his wife Shilpa is astute where it concerns money management and they collectively take out an hour every month to monitor their finances.

“She helps me in making broader investment decisions, but more importantly she’s actively involved in our succession discussions and ensuring all the nominations and second holdings are in place."

The couple also makes it a point to actively make their 12-year-old twins aware of the concept of money and the comforts and downsides that come along with it. “It’s very important because they are growing up in an environment very different from the humble backgrounds that we come from," he said.


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