Equity markets, in the last few months, have been extremely volatile on the back of rising global market volatility. Globally, rising inflationary concerns and geopolitical tension have led to a sharp fall in equity markets across the globe in February. However, the month of March witnessed some recovery. For Indian markets, rising crude oil prices and continuous selling by foreign institutional investors will only add to the volatility.
According to a report by domestic brokerage house ICICI Direct, multicap or flexicap funds are better placed for most investors in the current environment.
This was also witnessed in the February mutual fund data as well. Flexi-cap funds received the highest inflows during the month at ₹3,873 crore versus ₹2,527 crore in January. It was the most popular fund in the previous month as well.
It also advised investors to be extremely careful while investing in sectors funds.
Meanwhile, sectoral funds were the second most chosen fund for the month with inflows at ₹3,441 crore, the data showed. In January, it witnessed inflows worth ₹2,072 crore.
The sharp rotation in the sector has led to various sector funds or market cap funds moving from best performing to worst performing within a short period of time, the ICICI Direct report added.
However, as markets saw some recovery in March 2022, midcap and small-cap funds did outperform, it noted, adding that value-buying emerged as many of the small-cap and midcap stocks had corrected significantly in the last three months.
Midcap and small-cap funds have been getting higher inflows in the last few months while flexicap category remains a major preference for investors, the report informed.
"Pharma and IT funds also witnessed a comeback in the last one month after having underperformed prior to that. Banking funds, after having recovered again, witnessed an underperformance in the last one month," mentioned the report. Global funds continue to underperform as the Indian market outperform their global peers.
Going ahead, it believes that the volatility, in general, is likely to be higher over the next few months. The higher volatility will continue to lead to sharper rotation of performance within sectors and market segments, ICICI pointed out.
While remaining constructive on midcap and small-cap funds, investors need to be cautious on these funds as volatility is likely to be higher in this segment, it noted.
Despite a three percent slump in Indian markets in Feb and continued FII outflows amid the worsening Russia-Ukraine crisis and its impact on global growth and inflation, net inflows in equity mutual funds rose 32 percent in February on a month-on-month basis.
As per the AMFI data, net inflows in equity mutual funds came in at ₹19,705.27 crore in February 2022 as against ₹14,888 crore in January indicating the confidence of investors in Indian markets despite the recent sell-off.