How to Make the Most of Market High With Best Mutual Funds
Nov 02, 2019

Author: Divya Grover

(Image Source: Image by Gerd Altmann from Pixabay)

Festive celebrations extended at the equity markets as the S&P BSE Sensex and Nifty 50 rose for the fifth consecutive day on October 31, 2019. On the same day, the S&P BSE Sensex touched a new a high of 40,392 for the first time since June 03, 2019.

The key factors that drove the rally were domestic and global cues such as pick-up in demand during the festive season, better than expected Q2 corporate results, possibility of review of taxes such as LTCG, DDT and STT, rate cut by US Federal Reserve, and reports of US-China nearing trade deal.

So are the bulls here to stay?

Before you indulge in the mithai of optimism, here is a reality check:

The market rally was yet again led by a handful of large caps; the mid and small caps are yet to witness major recovery, despite favourable valuations. Economic support is vital for the growth of mid and small cap companies; the on-going slowdown in the economy has affected them the most.

[Read: Does It Make Sense To Continue SIP-Ping Into A Small-Cap Fund Now?]

Graph: Large caps race ahead, mid and small caps trail

Data as on October 31, 2019
Base taken as Rs 10,000
(Source: bseindia.com)

Besides, unemployment continues to rise resulting in low income and weak demand. While the corporate profitability has grown because of lower corporate tax rate, on the other hand revenue growth has been unimpressive due to weak demand.

The core sector output declined by a sharp 5.2% in September (one of the lowest in the recent years) indicating continued slowdown in the economy. Production of seven out of eight core industries declined during the month compared to a year ago.

These factors point out that the GDP growth numbers could be weak in the second quarter as well. If the health of the economy does not recover, the rally is unlikely to sustain over the long term. The market may thus remain volatile -- fluctuating between highs and lows -- at least in the near term.

[Read: Why Bet On High Alpha Funds In This Gloomy Market]

However, the market has reasons to be optimistic.

India targets to become a USD 5-trillion economy by 2024-25. The government and the RBI have taken steps to boost private investment and shore up demand. It may announce more reforms and policies in the near future to revive the economy and achieve the set target.

This bodes well for India Inc. and consequently, for the equity markets, it will mean higher growth. As an investor, you, too, can be a part of the growth story by investing in the best mutual funds.

[Read: How Announcements from Finance Minister Impact Your Equity Mutual Funds]

Not all mutual funds are well placed to perform well across market phases and reward investors with superior returns. Inconsistent performance of a fund can have a negative impact on your returns. This makes it important to choose worthy funds for your investment portfolio.

Relying heavily on the star-ratings, past performance of the fund or recommendation by friends/relatives is not a prudent way to pick funds.

The first step to select winning funds is to evaluate your financial goals, risk profile, and investment horizon. Thereafter, depending on your personal needs diversify your investment across various categories, sub-categories and investment style of mutual funds and carefully assign weights to each of them.

But avoid lapping up too many schemes as over-diversification can cause more harm than good.

Consistency of performance is what you should be looking for while shortlisting a fund for your portfolio. You can assess the consistency of the mutual fund by evaluating its performance in comparison to its benchmark and category peers. Check if the fund has performed relatively well across bull and bear phases and delivered better risk-adjusted returns.

Qualitative parameters such as portfolio characteristic, efficiency of the fund manager and the fund house also needs to be assessed. Select funds that fare well on both quantitative and qualitative parameters.

Do not stop/pause or redeem your investment when the markets turn volatile. Remember that equity investments take time to grow. To make the most of your mutual fund investment, avoid timing the market and invest for a long term through systematic investment plan.

[Read: Why You Should Not Stop Investing in Turbulent Times]

Once you have built a solid mutual fund portfolio, conduct a periodic review of the portfolio to check if you are on track to achieve your goals and if there is a need to rebalance the portfolio.

As an investor, it may be difficult for you to evaluate the schemes on all the above mentioned parameters. What you need is superlative research-backed advice to be able to select the right fund for your financial goals and needs.

At PersonalFN, we have developed S.M.A.R.T. score fund selection matrix to select mutual funds based on these five variables test, viz.

Systems and Process
Market cycle performance
Asset management style
Risk-reward ratios and
Performance Track Record

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