Amid ongoing market volatility, spotting the sweet spot in the mutual fund industry can be tricky. It is not for the faint-hearted to invest when the market is seemingly in a free fall. However, any rational investment advisor would tell you to make the most of the current market correction, and to sustain the momentum of investment.
But it is easier said than done. Since the market correction may continue for some more time, investing large sums at this moment may not be a prudent thing to do. Wealth advisors, therefore, advise investors to invest in small tranches over a period of time, i.e. through systematic investment plans (SIPs).
Let us explore more on what investment advisors suggest.
Invest in large caps
Whenever the markets face uncertain future, investors look for the cushion of security. And more often than not, investors can derive this security from large-caps funds. Although funds in this category also face a certain degree of volatility, they are relatively less risk prone as compared to their mid-cap and small-cap counterparts.
“In view of the recent fall, investors can explore investing in the large-cap funds. And since there is no idea as to what extent the market will fall, the better idea would be to invest in tranches,” says Sridharan Sundaram, Founder and principal officer, Wealth Ladder Direct.
“Investors who have slightly higher risk appetite can even go for large and mid caps for anywhere between 3-5 years. And the investors with high risk appetite can go for mid caps for a long period i.e., 5-7 years,” he adds.
About the reason for investing in tranches, he said: “There could be further market correction because what the market is witnessing is a mere tip of the iceberg.”
Preeti Zende, a Sebi-registered investment advisor and co-founder of Apna Dhan Financial Services, also recommends investors to invest in large cap or index funds.
“Due to uncertain future, it is always better to stick to large-cap or index funds. There is a possibility of lot more pain in mid and small-cap categories. These sectors may face such volatility for longer time,” she says.
What about flexi-cap funds?
Market volatility is the best tool to check investors’ risk-taking ability. It’s a reality check of patience for many retail investors.
“If you are reasoned investors then you can continue your flexi-cap investments. But select only those flexi caps whose fund managers have deep understanding and back of investing in such side-ways market. Skill of fund managers matters a lot in such volatile situation,” Zende explains.
At the same time, Nitin Rao, Head, Products and Proposition, Epsilon Money Mart, is quite hopeful about the market and sees market correction as a step towards the emergence of value.
He also recommends to invest in large caps since they offer a cushion of low volatility.
“We would suggest investors to continue their SIPs and invest money they can afford. Large caps provide you with the cushion of less volatility and investors having a risk appetite, can look for flexi caps as historically, fund managers have followed a > 50% allocation in large caps. This is not the time to be a blind bull considering the fast-changing environment, thus prudent asset allocation catering to your goals should be the dictum,” adds Rao.
“While some short-term pain can continue, we are slowly but surely reaching the stage where value is emerging. Talking fundamentals purely, PE of Nifty has reached its long-term average of 20 and is currently offering an attractive yield of 1.5%,” he adds.
Rao also highlights the fact that even small caps have lost a lot of froth with as many as 200 companies quoting below their 40-month EMA (exponential moving average).
This is certainly not the first time that we have seen the pain, and this will obviously not be the last time.
Note: This story is for informational purposes only. Please speak to a SEBI-registered investment advisor before making any investment related decision.