Increase exposure to hybrid equity products

After nearly a decade of low and falling interest rates, the first rate increase by the US Federal Reserve of 25 basis points ((bps) was largely expected. It's no surprise the markets have been upbeat as one major event of 2015 is now behind us.

The US Fed has been talking about the rate increase for some time now and, hence, this first hike was fully assimilated by the markets. We were optimistic this would not have any major negative reaction on the markets, and that a correction, if any, wouldn't have been too deep.

What most investors were keenly watching out for was the post-policy commentary for any negative surprises in the coming year 2016, and that too did not disappoint investors.

On that front, the policy stance reasoned robust labour market developments had boosted market confidence, and that inflation would return to two per cent over time. Even as it starts to normalise rates, the US Fed's balance sheet will remain stable via continued reinvestments of maturing assets.

With the Fed reiterating its earlier stance that further rate hikes would be gradual, and an accommodative stance would be maintained, much of the negative overhang of a rate cut is now behind us.

We always believed the risk aversion towards Indian markets triggered by a likely increase in policy interest rates by the US Fed might not be deep for two pertinent reasons.

First, the current account deficit is quite comfortable, which is why the rupee has been relatively stable compared to other emerging market currencies.

Second, the gap between the US and domestic interest rates is substantial, despite a 125-bps rate cut in the domestic economy, which balances the interest rate scales between the US and domestic debt markets.

One reason for the recent volatility in the equity markets lately has been the fall in commodity prices, which are at a multi-year low. The markets might remain susceptible to lower commodity prices and could see some further volatility till there is some price stability in commodities.

Hence, one cannot rule out the possibility of further choppiness in the markets over the short- to medium-term. However, with the economic growth a work-in-progress, we are quite optimistic about the market's long-term prospects. All this should keep asset-allocation and large-cap equity-oriented funds on top of the list of investments one should make.

On the debt side, there seems to be a good opportunity for investors as yields might ease in the near-term. With growth a little sluggish and commodity prices lower, inflation will remain subdued. Therefore, we continue to remain sanguine about the prospects of debt funds.

While the US Fed might raise rates in the coming year, there's no need to worry as the strength in domestic markets can counter any further negative influences on emerging markets. The Indian economy is on a sound footing to counter the negative surprises due to its inherent strengths of strong growth, lower oil prices and current account deficit. Make use of the volatility, if they happen, by making fresh allocations to hybrid equity products.