The S&P BSE Sensex went up by another 350 points on February 20 to 73,057, while Nifty rose to hit an all-time high of 22,215 level. With Indian equity markets continuing their rally unabated, financial experts are suggesting that mutual fund investors need to be a little cautious at this time and avoid heavy investments in riskier parts of the market.
Data available with ACE MF shows that Nifty 50 Total Return Index (TRI) has delivered 25 percent, 15 percent and 17 percent returns on a one-, three- and five-year basis, respectively.
However, certain pockets have seen faster rallies. For example, Nifty Midcap 150 TRI is up 57 percent on a year basis, while Nifty Smallcap 250 TRI has gained 67 percent. Over the past three years, midcap and smallcap stocks have outperformed largecap stocks by a huge margin.
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Outperformance in certain pockets of the market has raised concerns about overheating. So, should you tweak your mutual fund strategy?
No letting up by Indian investors
According to a note by Motilal Oswal Financial Services, Nifty, after recording 20 percent yearly gain in calendar 2023, began the year on a cautious note.
“The month was characterised by extreme volatility, with the benchmark oscillating in a wide range (around 1,000 points) and pulling back from record highs to close flat on a month on month basis. In January, Foreign Institutional Investors (FIIs) posted the highest outflows of $3.1 billion since February 2023. Conversely, Domestic Institutional Investors (DIIs) recorded the sixth consecutive month of inflows at $3.2 billion,” the firm said.
Meanwhile, investments via systematic investment plans (SIPs) in mutual funds hit a fresh record high of Rs 18,838 crore in January as against Rs 17,610 crore in December.
In terms of valuations, the one-year forward Price to earnings (P/E) stands at around 20 times, which is higher than the historical average.
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As per a note by Tata Mutual Fund, the risk reward ratio in largecaps is more favourable now.
What should be your strategy?
Keep in mind that mutual fund strategy doesn’t work like direct stock investing where you might look to book profits, stop fresh investments or go heavy on stocks, depending on the market movements.
A key concern for a direct stock investor when an index hits an all-time high is whether the valuations are expensive or not. But this is not the case in mutual fund investing.
In mutual funds, there are two buckets of investments—core and satellite. The investment in the core portfolio should continue despite market gyrations if anyone has long-term goals.
“If a person has long-term goals for eight years and above, and even if their investments are in small-cap and mid-cap funds, we are advising them to continue their monthly investments without stopping on a month-to-month basis,” said Nishith Baldevdas, founder of Shree Financial and a SEBI-registered investment adviser.
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Baldevdas, however, suggests that any additional flow or lump sum investment (over and above ongoing regular monthly investment) should not go into expensive categories at this point. “Extra money needs to start going into debt categories or less aggressive equity categories, where the downside is protected,” he said. Further, with interest rates poised to fall later this year, you mustn’t ignore this asset class. Your asset allocation demands that you allocate some portion of your overall corpus in debt as well. And in times like this when your portfolio gets skewed towards equity, you should switch the gains to debt.
“If midcaps and smallcaps have become a disproportionate part of your portfolio, then look to rebalance the portfolio after taking into consideration exit loads and taxation. At this point, investors can still consider large lump sum investments in largecaps or balanced advantage funds, only if the time is on their side. At the same time, for lump sum investment in smallcaps, I would be very circumspect, because the drawdown can be very sharp from here on,” Deepak Chhabria, chief executive officer & Director of Axiom Financial Services suggested.
Thus, reaching a particular Nifty level alone may not be a sufficient reason to change your mutual fund investment strategy. It's essential to consider your overall financial situation, goals, risk tolerance, and the need for diversification.
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