‘ESG risks, opportunities must be focal point of investments’

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Investments in sustainable, or environmental, social and governance (ESG) funds class, have quadrupled in the past three years and stood at just above 10,000 crore as of March. Piyush Gupta, director, fund research, Crisil Ltd, believes the covid-19 pandemic has amplified calls for embracing sustainability and made a compelling case for corporates, lenders, investors and policymakers the world over, including in India, to consider ESG in their decisions. He spoke with Mint on the importance of ESG investing and other key investment themes. Edited excerpts:

There is still no standard definition of what qualifies for ESG. In this context, do ESG funds make sense?

ESG as a concept is gaining momentum in India. While there is no clear definition of what constitutes an ESG investment, the underlying premise is that ESG as a strategy should consider previously overlooked environmental, social and corporate governance issues and risks emanating from the company’s operations as well as take advantage of the opportunities it may present. This strategy can be applied in many ways. For example, investors may choose to exclude certain negative sectors or only invest in best-in-class companies within the sector. Whatever the approach may be, ESG risks and opportunities should be one of the focal points for decision-making to qualify as an ESG investment.

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Inflows into equity mutual funds almost halved in June as investors went for profit booking. Would you say this is the right strategy given where the markets are?

Investors should avoid timing their market entry and exits based on short-term rallies. Instead, their investments should be driven by financial goals and investment horizons.

Investing in equity is fraught with volatility in the short term. It is heartening that investors have continued to invest in the category through systematic investment plans (SIPs), unperturbed by market volatility.

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Small-cap funds have been getting decent inflows on the back of over 100% returns delivered by such funds. Do you think this space has become risky?

While small-cap companies have the potential for sharp growth, they are prone to risks as well. Investors should not be affected by short-term market movements (on both sides). Whichever category of mutual funds they choose to invest in, their decision should be based on the fundamentals of prudent financial planning and their risk-return profile.

Stocks are pricey thanks to loose monetary policy and huge stimulus injections to cope with the pandemic. Does it warrant higher allocation to bonds?

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Striking a balance between equity and debt allocations helps tide over the volatility in these two asset classes. The allocation between the two is a factor of risk appetite and the investment horizon of an investor. Between long- and short-term debt, the allocation should be determined based on the expected interest rate.

Is it becoming more difficult for investors to get meaningful returns without taking extra risk?

Interest rates have been trending at low levels for quite some time now, and this has affected real returns from traditional fixed-income instruments. Hence, among alternative investment avenues, investors have looked at covered bonds and debt mutual fund categories, such as banking and corporate bond funds, given their relatively safer credit profile.

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