While considering the suitability of a mutual fund for the long term, it’s crucial to base the decision on the investor’s return objectives and risk tolerance rather than relying solely on short-term tactical market outlooks. Considering the present market conditions, Sahil Kapoor, Senior EVP, 360 ONE Wealth favours funds that possess the flexibility to navigate various market capitalisations, including flexi-cap, large and mid-cap, and focus funds for the next five years.
“This adaptability allows investors to capitalise on opportunities across different segments,” Kapoor said adding equities appear promising when viewed through a 5-year lens. Investors should consider maintaining exposure to this asset class to benefit from long-term growth prospects.
In an interaction with Business Today, Kapoor also said that it is prudent for investors to diversify their portfolios by incorporating some debt and gold. These asset classes can act as a safeguard during market downturns and enhance the overall risk-return profile.
“To add debt exposure in a tax-efficient manner, investors should consider hybrid balanced funds. These funds offer a convenient way to strike a balance between equity and debt components within a portfolio,” he said.
He further added that one should explore mutual funds that invest in commodities and international equity for further diversification and exposure to different markets. These options broaden the investment universe.
In the hybrid and multi-asset funds (MAFs) category, he recommended funds with approximately 35-40 per cent allocation to domestic equity. This allocation strategy maximises the distribution of investments across other asset classes like debt, gold, and international equity.
Sharing his views on the domestic equity markets, Kapoor said that large cap stocks are reasonably valued, considering their earnings growth trajectory. However, the valuation of mid-cap and small-cap stocks is trading at historic highs relative to large caps.
“This suggests that investors should exercise caution, especially in the mid and small-cap space. Some segments within these categories have surged beyond expectations,” Kapoor said.
His views came at the time when the benchmark BSE Sensex traded nearly 9 per cent higher against the levels seen in December 2022. On the other hand, the BSE MidCap and BSE SmallCap indices traded 28 per cent and 30 per cent up on a year-to-date basis.
Key risks
While the Indian market appears well-positioned for the long term, there are short-term risks to consider. “Factors such as persistently high oil prices, a slowdown in China and the Eurozone and the Fed’s potential inability to cut rates due to elevated CPI (Consumer Price Index) readings mean that investors should cautiously approach the market. It is advisable to focus on large-cap names and companies with a strong track record of earnings visibility,” Kapoor said.
Sectors to watch
He also added that one sector that has not fully participated in the recent market rally is pharmaceuticals. The valuations here have also moderated, which makes a case for closer examination. Similarly, the IT space and private sector banks have largely not been part of the recent market surge. In contrast, the capital goods sector has seen significant activity, with a visible order book. However, it’s essential to be cautious regarding valuations in this sector.
Fixed-income strategy
Amid the elevated fixed deposit rates and comparable taxation to debt funds, Kapoor suggested investors should acknowledge the higher tax rates on direct debt investments and opt to allocate at least 40-50 per cent of their fixed-income portfolio to high-grade liquid debt securities through mutual funds. Mutual funds offer advantages such as diversification, cost-efficiency and tax deferment compared to direct investments.
“Investors can consider balanced hybrid funds for the remaining portion of their fixed-income allocation. These funds typically allocate 50-55 per cent of their portfolio to debt instruments. This strategy allows investors to maximize their exposure to high-grade debt instruments while maintaining tax efficiency through the balanced hybrid fund structure,” he said.
The market watcher also said another avenue worth exploring is Real Estate Investment Trusts (REITs). These can serve as a viable substitute for debt investments.
Advice to new investors
Kapoor believes that the market follows cyclical patterns and it is intriguing how investors tend to make the same mistakes in each cycle. While every market cycle has its unique aspects, they often bear an uncanny resemblance to past cycles. “Therefore, I strongly advise newcomers to delve into financial history and gain a deep understanding of how market cycles operate. Avoid getting swayed by the allure of “it's different this time” narratives. For those considering a career in finance, exploring wealth management and asset management roles can be particularly rewarding and fulfilling, as they offer opportunities to apply your knowledge of market cycles and financial history to help clients achieve their financial goals,” he said.
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Business Today