Rule-based investing can be investors' best bet: Ashutosh Bhargava of Nippon India MF

Rule-based investing is gaining traction in recent times and a lot of mutual fund houses have started incorporating the multi-disciplinary rule-based approach in their schemes. Ashutosh Bhargava, Fund manager and head-equity research, Nippon India Mutual Fund, said that relying on just one aspect of valuations and macro forecasting have their challenges and hence a rule-based approach taking into account momentum, valuation, volatility etc can be a much better approach to generate alpha. He said that in a world where forecasting is becoming challenging a systematic asset allocation process offers great value.

"Forecasting is extremely difficult in terms of macro. At the moment, there is a war going on, interest rates are going up globally, IMF has hinted at an impending global recession. There are a lot of uncertainties in the world and fore-casting or just looking at valuations can not be the best strategy. There are some fundamental problems in the valuation approach also. Historically, the valuation approach also has failed in the short term. Valuations can remain irrational in shorter periods. Hence, narratives and forecasting are overrating, assessment is an underrated tool. A multi-disciplinary approach can be a solution. It involves a bit of valuation- PE, PB, macro and momentum. Commodity prices, international currency prices and interest rates, everything has to be looked at when you select stocks. In short, rule-based investing helps you improve your odds," said Ashutosh Bhargava.

Bhargava said that with an asset allocation framework where one can combine fundamental factors like valuation, technical factors like momentum, and macro and behavioral factors, 99% investors can improve their odds of generating alpha. He also stressed on the fact that the rule-based models reduce behavioral biases, even though the models are created by humans. He said that the mutual fund industry is moving fast towards adapting rule-based investing and it can benefit investors in the long run. He said that dynamic asset allocation funds, low-vol funds and momentum driven funds are coming up from various fund houses and it is a good sign.


"Dynamically managed funds using the multi-disciplinary rule based approach are better placed in the market. If macro is useful but difficult to practice and valuations are less useful in a shorter term, then looking at technical factors becomes the best bet. Naval Ravikant said that the efficient market hypothesis fails because humans are hard animals, not independent rational actors. Hence following the rules is a smart call," said Ashutosh Bhargava.