Want to beat the markets in this correction? Here is expert investment advice

The market turmoil over the past few months have left investors, especially the newly entering ones rather anxious. For new and old investors alike, building a structured portfolio in a systematic fashion with a set of diversified mutual funds across categories based in risk appetite and goal horizon are critical to achieving life goals. Markets at lower levels mean stocks becoming available at lower valuations.

But when markets correct swiftly, there are opportunities available outside the traditional investment avenues. For those with higher appetite for risk, theme and sector based funds may appear more attractive after the fall. But these do require you time your entry and exit for getting the best returns. Others with lower risk appetites, but with a surplus available can dabble in such schemes with small amounts.

Moneycontrol spoke with a few experts to find out investments that could offer alpha – excess returns over the market.

Healthcare Funds

The one-way rally from the lows of March 2020 made many investors drop all inhibitions and go for cyclical stocks, especially in CY2021. No wonder then that defensive bets such as healthcare took a back seat. According to Value Research, healthcare funds on an average gave 9.98 percent returns over last one year ended February 15, 2022, compared to 17.48 percent.

However, the sector may be a preferred contrarian buy for savvy investors. “The stock markets are expected to remain volatile for some time now. We like healthcare sector as it is a defensive sector which should help to contain downside in a volatile phase,” says Rupesh Nagda, Founder and Managing Director, Family First Capital. Recent correction in pharma stocks can be a good entry point and staggered investments should work better for investors, he adds.

Feroze Azeez, Deputy CEO, Anand Rathi Wealth says, “Healthcare sector should do well on account of multiple factors supporting growth over next two to three years. Increase in health insurance penetration and general awareness about healthcare along with focus on high growth segments of pharmaceuticals manufacturing should reward investors.”

Both Nagda and Feroze recommend investments in Nippon India Pharma Fund.

Banking & Financial Services schemes

Though defensive sectors will be in demand in a volatile phase of stock markets, cyclical sectors cannot be ruled out. In a volatile phase, some of these may be hit hard and lower prices can offer a good investment opportunity for long term investors. “As interest rates go up, many lenders may go through turbulent times. However, as the economy grows, the demand for credit will also catch up. It means you get an opportunity to buy future growth at attractive prices,” says Rupesh Bhansali, Head- Mutual Funds, GEPL Capital. He prefers SBI Banking & Financial Services Fund.

Banking and financial sector funds invest in a wide variety of businesses including commercial banks, housing finance companies, non-banking finance companies, asset management companies, insurers, broking and wealth management outfits among other financial service providers. Over last one year they have delivered only 3.88 percent and have severely underperformed broad markets.

Most investors question why one need to allocate to this sector when it enjoys high allocation in most diversified equity funds. But Ravi Kumar TV, founder of Gaining Ground Investment Services has a different take, “With the help of technology, financial services are growing at a high rate. A diversified equity fund may not be taking meaningful exposure to niche businesses in this sector.” Many investors can connect with financial services as they are exposed to them in their day to day life or in the course of employment and can take more informed decision about investments in this sector compared to many other sectors such as healthcare, capital goods and technology, he adds.

Infrastructure MFs

Another cyclical but well diversified theme investors can look at is infrastructure. Despite all the infrastructure building and the government impetus, the sector has not rewarded investors over last 10 years. The infrastructure funds gave 11.83 percent compared to 14.45 percent by flexicap funds. But things can be changing. The broad-based economic recovery is here and may lead to a situation where many sectors see expansion in economic activity.

“On the one hand we have pro-infrastructure government policies and on the other hand there are initial signs of revival of capital expenditure in private sector at a time when the interest rates are low. This should bring in growth in earnings for many infrastructure companies,” says Bhansali. He likes Canara Robeco Infrastructure and Kotak Infra & Economic Reform Funds.

“Asset owners in ports, airports and other segments should see massive rerating if we see negative real rates for long period of time. This pool of companies in infrastructure has severely underperformed over last 15 years. They are likely to see investors from across the globe, ultimately pushing up share prices,” says a fund manager who is not allowed to speak with media.

Do not miss the smart beta strategy

While thematic and sector funds can add some extra returns by taking some extra risk arising out of concentration, there are investors who want to look for a more diversified strategy that offer consistent outperformance to broad market. Roopali Prabhu, Chief Investment Officer, Sanctum Wealth recommends investments in ICICI Prudential Alpha Low Volatility 30 ETF for those with more than five-years' investment timeframe. “The smart beta strategy uses combination of two factors of investing - alpha and volatility. It has exhibited consistency in outperformance compared to seasonality in outperformance shown by most other single factor smart beta strategy. That makes it a core portfolio candidate,” she adds.

What should you do?

Sector or thematic funds work for investors who can time both their entry and exit. Though thematic funds are attractive at a particular price, in all cases mentioned above the experts are advising staggered investments to benefit from impending volatility.

If you do not have a core portfolio in place, then avoid making such investments. If you have seen a couple of market cycles play out, then you may consider investing in such strategies. If you cannot devote much time for your investments and still want some thematic exposure, then take a look at ICICI Prudential Thematic Advantage Fund of Fund which aims to identify the next big sector or theme and generate alpha.

Most individual investors are better off investing in diversified flexicap and multicap funds using systematic investment plans.