In recent times, the markets have remained choppy. We have seen a runaway rally over the last three to four years and the equity markets are currently trading at a premium. The good times, as we have been experiencing, may not last.
NSE 500 companies experienced earnings deceleration in Q1 FY25, with 300 of 500 companies reporting a 6 per cent quarter-on-quarter decline in earnings while showing a 3 per cent year-on-year growth primarily due to a 21 per cent year-on-year growth in banking and financial services (BFSI) companies.
“Excluding BFSI, 229 companies reported a 7 per cent year-on-year and 10 per cent quarter-on-quarter decline in earnings. In such a scenario, capital is likely to flow towards companies with better earnings growth, making stock-picking crucial, similar to the 2009-2013 period,” says Manish Bhandari, CEO and Portfolio Manager, Vallum Capital Advisors,
a Securities and Exchange Board of India (SEBI) registered investment advisor (RIA). In such a scenario, what should be your mutual funds strategy? We take a look.
The Budget Driver
The budget this time, highlights three themes. And these should guide your mutual fund investment strategy going ahead. Consumption Boost: “A 75 basis points (bps) boost to GDP through government spending, which has gone largely unreported, is expected to drive private final consumption. Despite multiple macro factors, real private final consumption has not yet reverted to its pre-Covid growth rate of 4 per cent compound annual growth rate (CAGR),” says Bhandari.
He adds that Centre’s revenue expenditure (excluding interest) stands at 7.8 per cent of GDP, up from 7.5 per cent in the interim budget but still below the FY21 high of 12.1 per cent or the pre-NDA era (FY13: 9.4 per cent). An approximate one per cent increase in government spending is estimated to increase final private consumption by 3.9 per cent.
Tax savings of Rs 15,000 per average taxpayer, combined with employment generation schemes worth Rs 2 lakh crore over five years, could boost GDP by 75-80 bps annually with a minimum consumption multiplier of 4x. Consumer themes like staples, footwear, kitchen appliances, consumer durables, value fashion, building materials, and chemicals with export potential are expected to perform well over the medium-term.
Long-term Investments: “The government has signalled its commitment to long-term investments by substantially increasing short-term taxes while aligning long-term taxes across asset classes,” says Bhandari.
Job Creation: Government efforts to create jobs will further stimulate consumption.
Bet On Themes “This journey of rapid growth over the next few years and decades will be led by infrastructure, manufacturing, financials and consumption. All these themes translate into a secular growth story and will provide multiple opportunities for investors,” says Harsh Gahlaut, Co-founder and CEO, FinEdge, a wealth management and investing platform.
However, that is just one side of the India growth story. “In our view, the biggest change in the third innings has been the perceivable tilt of policy making towards rural markets. Minimum support price (MSP) increases on Kharif crops, scheme to lift edible oil output, sops on tax etc. and relatedly a prognosis of a normal monsoon by the two major forecasters – IMD and Skymet should mean better prospects for rural markets,” says Jitendra Sriram, Senior Fund Manager, Baroda BNP Paribas Mutual Fund.
These can be played through multiple ways such as FMCG, tractors and two-wheelers (farm equipment / mobility solutions), crop chemicals (farm inputs) or rural retailing etc.
“However, investors should be aware that many stocks related to these themes have already seen substantial appreciation and are currently trading at higher-than-average valuation multiples, which might temper the potential for further sharp gains,” says Umeshkumar Mehta, CIO, SAMCO Mutual Fund.
Gahlaut warns that from a long-term perspective of investing, it would be advisable not to under-diversify your portfolio by having too many sectoral or thematic funds as they can be cyclical and will increase unnecessary risk in your portfolio.
Temper Your Expectations
Numerous theories suggest that after periods of market exuberance, phases of mean reversion are inevitable. While history supports this, predicting the exact timing of a market peak is impractical.
“Historically, the market returns about 12-15 per cent annually. The exceptional returns of 40-50 per cent in small and mid-funds (SMID) in recent years are unlikely to continue,” says Soumya Sarkar, Co-founder of Wealth Redefine, an AMFI registered mutual fund distributor.
Investors should adopt a long-term perspective, maintain a diversified portfolio, and be prepared for potential market corrections. It’s crucial to remain patient and avoid making hasty decisions based on short-term market fluctuations.
“As an investor, having the right expectations is the key to achieving investing success. We have seen a runaway rally over the last three to four years and the equity markets are currently trading at a premium. This should be a time to reduce return expectations and ensure your portfolio risk is aligned with your investment horizon,” says Gahlaut.
However, it is important to remember that the momentum is still expected to stay with the Indian markets. Sumit Agrawal, Senior Vice President, Equities, Bandhan Mutual Fund, says that earnings are likely to compound by mid-double digits over the next few years.
Even if the valuations moderate, market returns would still be healthy. “Investors can choose to invest in many segments and different sectors. Returns will vary but I think they will still be healthy,” he adds.
The Indian economy is slated to grow around the 7 per cent mark which is largely the basis for consensus forecasting a mid-teen growth for the benchmark Sensex or Nifty indices.
Markets are likely to track this earnings growth, thus though the returns may not be as heady as the immediate preceding years, we believe these are still ahead of inflation. “Further, at some point later this year and early next year, the US Fed is likely to commence its rate easing cycle which should aid the movement of money to emerging markets apart from lowering the global cost of capital,” says Sriram. This should be favourable for large caps which is typically the usual beneficiary of FII flows.
Rebalance Your Portfolio
Focusing solely on mid and small cap stocks is not advisable, especially given their recent rapid rise. “A balanced approach would involve allocating 25 per cent of an investor’s capital to mid and small cap funds to capitalise on their upward trend. The majority of the capital should be directed towards quality large cap stocks or different assets, which offer greater valuation comfort and stability,” says Mehta.
Here is where asset allocation comes in. “If an investor’s mutual fund portfolio is heavily tilted towards small and mid-cap funds due to their recent great returns, it may be wise to rebalance. These sectors have experienced exceptional performance, but such returns are not sustainable in the long-term. Investors should consider booking some
profits and reallocating to other segments to reduce risk. Maintaining a balanced portfolio aligned with one’s risk tolerance and investment horizon is crucial,” says Sarkar.
It is important for investors to review their portfolios by taking the help of a trusted financial advisor and re-draw their asset allocation in line with their goals and risk appetite.
Befriend Large Caps
Globally markets have been rocked off lately by an increase of volatility. Multiple factors have contributed which include the hat-trick of strikes by Israel on the Hamas leadership and the fears of a reprisal there. Recent jobs data in the US have increased fears of a slowdown/recession in the US. Bank of Japan’s recent rate hike also fuelled worries on the potential unwinding of the Yen carry trade.
Closer home, a regime change in Bangladesh also led to concerns on companies having exposure to these markets. “Typically, large caps are the low volatile segment of the markets as these large companies have weathered many a cycle and are more adept at riding out volatile phases. In our view this volatility makes the case for large caps stronger,” says Sriram.
Don’t Ditch SMID Funds
“While mid and small cap funds have delivered good returns in the recent past, investors should ideally not exit them completely as this space has the potential to outperform broader markets over the long run,” says Abhishek Tiwari, Executive Director and Chief Business Officer, PGIM India Mutual Fund.
“Small and mid-cap funds are great choices if your investment goal is at least ten years away and you are investing systematically. An investor must take the help of an expert and approach this scientifically, make informed decisions and not get swayed by herd mentality,” says Gahlaut.
In fact, as Siddharth Alok, AVP Investments, Multi Ark Wealth-Epsilon Money, a SEBI RIA says, asset mix is a very personal question. While it is always prudent to take some risk off the table, for investors who have a long-term horizon and invest every month in a disciplined manner, probably they may continue with their investments. “However, as a word of caution, small and mid-cap companies are volatile and returns are never linear but if we can sit through the entire cycle, historically the result is on our side,” he adds.
To Sum Up
Investors should know their risk appetite, be well diversified and continue their investments. Markets don’t give guaranteed returns, or do they? “In the last 44 calendar years of the Indian equity markets, we have witnessed only four years where periodic intra-year declines have been less than 10 per cent; three of them witnessed in the last decade. Yet three out of every four years have ended with positive returns. Thus, instead of worrying about something which is not in our hands, we as investors should focus more on something we can control – investing in a disciplined and prudent manner!” says Alok.
Also, we should remember investing is not a sprint, but a marathon and compounding takes time. Instead of always trying to find the best mutual funds to invest into which is not always humanly possible, we should to try to invest as much of our savings as possible as per our risk appetite and time horizon.
In the near term there are a couple of things to keep in mind. “Do not let your asset allocation tilt heavily towards equity. Also, be prepared for increased market volatility due to the upcoming US presidential cycle,” says Bhandari.
If you look at it, your investment strategy in mutual funds is rather simple. “The long-term growth story of India remains intact. One should continue investing through SIPs and also timely rebalance portfolios according to the asset allocation plan in consultation with one’s financial advisor,” says Agrawal. Overall, markets typically tend to be noisy in the short-term reacting to each and every news. In the longer term it tends to track growth/earnings. Disciplined investing is thus the key to have a successful experience with mutual funds.
