The equity markets have come a long way since it slumped to a seven-month low on September 19, 2019 amid sell-off by foreign portfolio investors (FPIs).
However, FPIs that had shied away from the Indian equities because of weak macro-economic indicators are now making a comeback.
This improved investor sentiment was on the back of a pick-up in demand during the festive season, the announcement of corporate tax rate cut by the finance minister, possibility that the government may tweak LTCG, DDT and STT, along with some positive global cues.
Market bellwethers S&P BSE Sensex and the Nifty 50 witnessed a rally for six consecutive days ending November 01, 2019, predominantly led by large caps. Mid and small caps too soared, though they are yet to catch up with large caps.
[Read: How to Make the Most of Market High With Best Mutual Funds]
Graph: How are the valuations looking?
Data as on November 01, 2019
(Source: NSE)
Large caps are known to provide stability across market phases. In the current economic slowdown, large caps have outpaced small and mid caps, and may continue to rise from here on as the economy recovers. However, the upside may be limited; large caps are trading at high valuations.
On the other hand, the correction in mid and small cap space provides value buying opportunity.
India aspires to be USD 5-trillion economy by 2024-25. The government and the RBI have taken several measures in the recent past to revive the economy and achieve the set GDP target. This may prove conducive for the growth of mid and small caps.
[Read: How Announcements from Finance Minister Impact Your Equity Mutual Funds]
Does this provide a good opportunity to invest in mutual funds with a multi-cap approach?
Multi-cap funds invest across market capitalisation and have the flexibility to shift the allocation to take advantage of the changing market conditions. Investors thus benefit from the stability of the large caps and high growth potential of mid and small caps.
Within multi-cap funds, you may find funds with varied investment styles adopting different market cap allocations. In the present scenario, the market is expected to be volatile in the near term and there is uncertainty over which market cap will outshine; constructing the portfolio could be a challenging task for the fund managers.
Most multi cap funds at present have a large cap bias. When mid and small caps rally, the fund may be unable to derive maximum returns if the fund manager is not quick to align its portfolio.
This makes it important to pay close attention to the asset allocation and investment strategy when searching for multi cap fund.
However, it may not be possible to get optimum diversification with a single multi cap fund, whereas holding more than one multi-cap fund may not prove to be beneficial as the portfolio of various funds overlap.
What you need is a strategic investment approach that can offer short-term high rewarding opportunities and long-term steady returns. A `Core & Satellite' approach to build a portfolio of equity-oriented mutual fund helps you do just that.
The `Core' part should form a majority of the portfolio (around 60%) and consist of more stable and long term holdings. It should ideally include a large-cap fund, multi-cap fund, and value-style fund.
The `Satellite' holdings form the rest (around 40%) and constitutes portion that can push up the overall returns of the portfolio. It can include mid-cap fund, large & mid-cap fund, and an aggressive hybrid fund.
`Core & Satellite' approach to investing reduces the risk to your portfolio through diversification across categories and investment styles. It can provide a cushion against the downside in a bear phase and outperform during a bull phase.
[Read: Is Your Mutual Fund Portfolio Strategically Placed As The Economy Slows?]
To derive the optimum risk-adjusted returns, carefully assign weights to each category of funds in the portfolio aligned to your personalised asset allocation plan. This reduces the need for constant churning of the portfolio.
While there is optimism in the market, it is important not to be swayed away by it. Remember, the economy still needs to come out of the weak industrial and agricultural output and rising unemployment, among other issues.
The long-term outlook seems positive, so far. It could reward you in the years to come, if you adhere to a sensible and strategic investment approach.
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