Market at record level: what should first-time mutual fund investors do?

When the benchmarks scale new peaks, what must small investors do? That answer lies in their risk appetite, which by itself is a function of familiarity with D-Street.

When the benchmarks scale new peaks, what must small investors do? That answer lies in their risk appetite, which by itself is a function of familiarity with D-Street.

So, the choices will differ for those buying equity offerings for the first time, and those that have seen multiple business cycles play out over the years.

  • 7.83%Annualized Return for 3 year
  • >3 years Suggested Investment Horizon
  • 7.11 YearsTime taken to double money
  • 7.88%Annualized Return for 3 year
  • >3 years Suggested Investment Horizon
  • 5.4 YearsTime taken to double money
Those beginning their investment journey are better off choosing balanced advantage funds, which are less volatile than pure equity funds. For the seasoned professional who can take the rough and tumble of D-Street with consummate ease, the riskier choices in equities seem infinitely better — at least in the current environment. For them, small- and midcap funds and stocks would be ideal, as Indian equities begin a more secular climb.

“First-time investors should adopt a cautious approach and stick to asset allocation funds,” said Amol Joshi, founder, Plan Rupee. Joshi said these funds have low volatility, and calibrate their equity exposure based on market valuations.

Joshi recommended ICICI Prudential Balanced Advantage Fund and Nippon India Balanced Advantage Fund. These funds, which invest in a mix of debt and equity investments, alter their equity allocations based on market valuations. In such products, the equity component can vary from 0-to-100%, and they work well for investors unsure about market direction.

Joshi said that aggressive investors with a time frame of 7-10 years could up their midcap equity allocation to 40% of their total equity allocation.

“Valuations of mid- and smallcaps are attractive relative to largecaps, and the margin of safety is high. This set of companies reported a strong set of numbers for the second quarter and domestic flows here are strong,” said Rajesh Cheruvu, chief investment officer, Validus Wealth. Rajesh recommended Axis Midcap and Kotak Emerging Equity funds.

Analysts expect a strong set of earnings growth from mid-cap companies. The Nifty 50 market capitalisation has reached an all-time high, but the value of the Nifty Midcap 100 is 30% lower than its peak of December 2017, says a report by Principal Mutual Fund. The report points out that the Nifty Midcap, which had traded at a premium to the Nifty, now trades at a discount. Its PE has corrected from 25.9 to 15.6, indicating there is value in midcap stocks.

Another report by Axis Securities points out that while institutional ownership of Indian equities is at its peak valued at $700 billion, small and midcap ownership within institutional portfolios has fallen by 600-700 bps to 14% from a peak of 20% in 2012.

Fund Scan
Balanced advantage funds 1-year returns (%) Mid cap funds 1-year returns (%)
Kotak BAF 14.5 Axis Midcap 18.43
ICICI Prudential BAF 13.17 Motilal Oswal Midcap 17.45
Motilal Oswal Dynamic 13.16 Tata Midcap 12.63
Invesco India Dynamic Equity 12.86 Kotak Emerging Equity 12.23
Baroda Dynamic Equity 12.65 DSP Midcap 12.17

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