'Volatility likely in market but trend to remain positive, certainly a good time for debt allocations'

Global and local factors such as rise in crude oil prices, global trade wars, weak rupee and rise in inflation resulted in weak retail sentiment, especially the high-end investors who stayed away from equity investing.

While the market witnessed some flip-flops, the long term structural story of India is intact. Some factors which will help revive flows in longer term are continuing equity market support through liquidity, as is seen in mutual fund systematic investment plan (SIP) numbers, which are now well over Rs 7,000 crore per month.

In isolation, July 2018 alone saw Rs 9,600 crore of net equity flows and another Rs 1,000 crore in ELSS schemes. These are huge by any standard (even though down from peaks) which will support the flows till sentiments recover.

The net inflows in pure equity funds this fiscal has been Rs 40,000 crore compared to Rs 38,500 crore in same period last year, thus indicating only a pause in equity flows.

With interest rates on the rise, do you think debt funds will be better option for investors?

While both equity and debt are attractive it is certainly a good time for debt allocations. Availability of higher yields is attracting investors in fixed maturity plans (FMPs) while there have been redemption pressure seen in open ended debt funds.

This does seem to be a good time for investors to rebalance portfolios to debt, especially if there are needs emerging over a timeframe of two to three years.

We would still advise investors to ride the higher rates through carefully chosen credit accrual funds with shorter duration and select FMPs. What is important is that the investor’s asset allocation must be maintained.

Inflow into Equity Exchange Traded Funds also turned negative (nearly Rs 4,000 crore). Also there has been a gradual fall in inflow into balanced funds from April (Rs 3,500 crore) to July (nearly Rs 300 crore). Any major reason to it and do you expect that to improve going forward?

As far as ETFs are concerned, we note that the outflows are not necessarily from the benchmark Nifty ETF, but from one specific ETF (almost to the tune of approximately Rs 5,000 crore). Therefore, the shortfall in flows is mainly attributable to a specific strategy that may have been implemented by select investors around this ETF, which is not too worrying.

In case of balanced funds, the first factor which impacted the segment is dividend distribution tax on equity resulting in shift of flows to debt with a three years perspective, since the difference in expected returns narrowed.

The continual uptick and rally in markets also took the sheen away from balanced fund investing to individual asset category- based fund investing.

This trend will continue till need for some risk aversion comes in for equity, which can then be done through exposure to balanced funds

FII flows improved in July (net buying of Rs 491 crore) compared to outflow in previous three consecutive months. Do you expect that to improve further?

FIIs were the first to react to improving global situations around reduced crude prices, improvement in trade ties across countries and the relative attractiveness of India due to earnings rebound, even as domestic investors remained cautious.

While we do not expect much flows to pick up from FIIs, however we are reasonably certain that outflows might not continue going forward.

Global trade war and its outcome could put pressure on the rupee and hence could be detrimental to FII flows.

The market reached new highs - the Nifty surpassed 11,400 levels and the Sensex marched towards 38,000. Is more steam left in the market or could it be range bound from now onwards to next one year?

Earnings growth has rebounded in this quarter and this trend is expected to continue. Going ahead progress of monsoons with sustenance of rural demand and corporate earnings would be important domestic factors that would influence the market, which is currently expecting a earnings rebound in corporate earnings.

US China Trade developments and crude prices could have a cascading effect for emerging markets including India. This could create volatility giving entry opportunities for investors for a medium-term perspective.

Upcoming important state elections and general election next year will keep the Indian market volatile and hence in all probabilities given the present valuations, the market will be largely rangebound, though the trend will be positive.

Midcap and small-cap also recovered from their 2018 lows but are still down 9-12 percent in 2018? Do you expect it to turn positive or remain volatile in next one year?

Considering the expanding valuation premium gap between midcaps and largecaps and issues around corporate governance in the midcap space, one saw outperformance in largecaps, with some catch up by midcap and smallcap stocks this month.

However a clear trend is being seen where there is increased attention being given on quality parameters of midcap stocks. This will result in narrowing of the midcap universe to quality investing where current levels should be sustained, as market sentiment rebounds, at least in the short term.

Volatility will remain through the year in line with general market direction.

What are the sectors that you advise people to buy and exit it at current levels?

We like select stocks in sectors such as financials, consumer discretionary reflecting consumption and materials.

If the Indian rupee depreciates further, we might consider select stocks in IT, Pharma and Auto Ancillaries which are export oriented.