Over the past three years, mid- and small-cap stocks have outperformed large-cap stocks by a huge margin.
"Recent equity returns have been high. One should not project these returns as normal returns for the future. A conservative estimate for future equity returns will enable investors to meet any financial contingency," said Rajeev Thakkar, Chief Investment Officer (CIO) and Director of PPFAS Asset Management Company.
Outperformance in certain pockets of the market has raised concerns about overheating. So, should you tweak your mutual fund strategy given market conditions? Let's take a deep dive
A key concern for investors when an index hits an all-time high is whether the valuations are expensive or not.
Data from ACE MF shows that the Nifty 50 Total Return Index (TRI) has delivered 48 percent returns since the start of 2021 on an absolute basis.
During the same period, Nifty Midcap 100 TRI gave a return of 101 percent and Nifty Smallcap 250 TRI, 108 percent.
The key reason for the rally has been the very strong mutual fund inflows into small- and mid-cap stocks over the past two years. Further, the impact of inflation has not been very deep on these companies. Also, there has been high demand in the economy, which has helped small- and mid-cap companies. This also coincided with foreign investors returning to the market.
"Going forward incrementally, clearly large-caps look much better placed compared to small- and mid-caps, because smaller-caps are somewhere around 2019-2020 levels, which is a bit higher than what we've seen historically," said Christy Mathai, Fund Manager-Equity, Quantum Mutual Fund.
Thakkar believes that while corporate results have been good, valuations are somewhat elevated.
"Near-term market movements are unpredictable, and it is not possible to say what will happen in the coming days," the CIO of PPFAS Mutual Fund said.
Where to find comfort?
As per Thakkar, domestic consumption-oriented segments have been expensive for some time and continue to remain so despite the time correction seen in some of these stocks over the last year.
In terms of the market outlook, energy prices have again started to move up. Also, India is entering an election year, which is always a big unknown. This may force investors to stay on the sidelines.
In terms of pockets of comfort, Quantum Mutual Fund is majorly into financials, largely banks, IT companies, and select autos.
"These pockets have reasonable valuations. Banks are fairly priced. You have comfortable valuations in IT, even though some demand has gone out of the system. And in autos, the volume recovery has been very strong," said Mathai.
Slam the brakes?
Nifty hitting the 20,000-point level is a significant milestone. However, whether investors should change their mutual fund investment strategy depends on several factors that are specific to their individual financial goals, risk tolerance, and existing investment portfolios.
As per experts, nothing changes for individuals investing via the systematic investment plan (SIP) route, as this strategy allows investors to reap the advantages of rupee-cost averaging over an extended period of time.
It's important to note that SIPs do not guarantee returns. However, over the long run, the expectation is that markets will trend upward, ultimately benefiting SIP investors.
However, lump-sum investors may want to go slow given the market conditions.
"Even though large-caps haven't rallied as sharply as mid- and small-caps, the valuations of all three segments have inched above their long-term averages. The markets are not in a bubble, but they are definitely in expensive territory. At least at this point in time, I'm not comfortable putting my money and my clients’ money in a lump-sum fashion in the market," said Rushabh Desai, Founder, Rupee With Rushabh Investment Services.
Additionally, Rushabh is of the opinion that this is a good time for investors whose goals are coming up in six months to one year to book profits and move into fixed income.
Meanwhile, Amol Joshi, Founder, PlanRupee Investment Services, suggests balanced advantage funds or multi-asset funds with a three-to-five-year investment horizon for investors who wish to make lump-sum investments.
"If you have a seven- to 10-year horizon, then we are currently doing a six-month systematic transfer plan (STP).
Stick with asset allocation
The markets have had a decent run-up over the past few months, and this would be the ideal time to bring back your portfolio with the desired asset allocation.
For example, if your targeted asset allocation is 70-30 with 70 percent in equities, and this market rally has moved the allocation to, say, 85-15, then you can use the market rally to bring it back within the targeted range.
Poornima Katpadi, Founder and Investment Specialist at Simplesolution4u, a Mangalore-based distributor, said, "The markets will continue to see historical milestones down the line. It doesn't necessarily mean that we have to keep changing our strategy because we have invested (for certain purposes). We should exit the funds only when we have achieved those financial goals. We may lose market opportunities if we exit now and try to return later."
Also, keep in mind that exiting mutual fund investments attracts exit load charges and a tax burden, which may eat into your returns. "Therefore, the strategy of churning your portfolio must be well thought out," she said.
Don't get excited about market milestones, but be watchful about the financial goals you have set and speed up your drive by enhancing your SIPs.
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. A well-thought-out investment strategy should be based more on your individual circumstances and long-term financial objectives than on short-term market fluctuations.
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