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Markets have been turbulent lately and there are a variety of factors responsible for this viz. slowdown in India's economic growth, constrained liquidity, debt crisis, unemployment woes, dismal corporate earnings at some counters, erratic rainfall (in some regions causing a flood fury), weak consumer demand, waning consumer confidence, deceleration in the pace of economic reforms. Additionally, Nirmala Sitharaman's maiden budget failed to impress the market, tax collections have fallen to decade low, there is a possibility of fiscal slippage, and trade wars and geopolitical tensions have amplified, among many other things.

Graph 1: The mid-and-small caps are hammered. Are you better off investing in large-caps?

Base: Rs 10000
Data as on August 20, 2019
(Source: ACE MF)

Indeed, there are a host of challenges for Modi 2.0 to tackle.

That being said, it would prove wise to take note of the famous quote, "Be fearful when others are greedy and greedy when others are fearful", by the legendary investor Warren Buffett.

You see, challenges do not mean all is gloom and doom. No!

In challenging times, markets are bound to be turbulent. And you are likely to feel the butterflies in your stomach while on the roller-coaster ride of equity markets.

But remember, volatility is the very nature of the equity markets. It's how we use it to our advantage, perceive the situation sensibly, and devise an efficient strategy that decides our investment success. Plus, at times being a wise contrarian can be rewarding in the long run.

I believe, now is the time to go against the crowd, when the mainstream media is painting a picture of despair and framing views that the potential to generate 'alpha' (or noticeable positive returns) is over, particularly in the mid-and-small cap space.

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

Currently, the valuations are relatively inexpensive in the mid-and-small cap space. The trailing 12-month P/E of the Nifty Midcap 100 has declined sharply and is trading below its long-term average.

Graph 2: Valuations in the mid-cap space offering some margin of safety

Data as on August 20, 2019
(Source: nseindia.com)

Similarly, the small-caps, which had rallied earlier, after the correction, look slightly appealing. Thus, there is a good opportunity for fund managers to do value hunting.

Nevertheless, the selection will play a crucial role to generate alpha, because many constituents-- particularly in the small-cap space--are making losses.

If you wish to multiply your investment returns in the volatile times through equity mutual funds, build an alpha portfolio.
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(Image source: pixabay.com; photo credit: rawpixel)

Do note that not every equity fund is an Alpha Generator!

Alpha Funds are "winners amongst the winners".

Alpha Funds make the rest of the winners shy of their performance. When the winners might rake in double-digit returns, the Alpha Funds are the ones that have the potential to rake in TRIPLE digit returns in the long term!

That's why they are in a sense, super-special in their own right.

If you select only one alpha fund, the odds might be in your favour. Hence, you need to own a strong set of Alpha Funds--around 5-6 -- that hold the potential to multiply your investment returns over the next 5-10 years.

Typically, you need a multi-cap fund, a mid-cap fund, a small-cap fund, a large & mid-cap fund, and large-cap fund. To mitigate the volatility, you could consider taking the SIP (Systematic Investment Plan) route as opposed to a lump sum investment, while you endeavour to compound your wealth leaps and bounds.

But as I mentioned earlier, selection is crucial. Not every equity mutual fund scheme is an alpha generator. You need equity mutual fund schemes that show stellar performance across time periods and have consistently outdone the benchmark index and category average by a noticeable margin (an alpha) with prudent risk management systems in place.

Is generating 'Alpha' possible in Modi 2.0 Era?

With the Modi-led-NDA government getting a second term after the 2019 Lok Sabha elections, at PersonalFN we believe, the reform process will continue and India will remain to be an attractive investment destination.

We may see a few drastic moves here and there, which will take the economy by storm-in the positive sense, of course.

The Modi 2.0 government is all set to increase the governmental capital expenditure and spending on infrastructure growth in the next few years.

India has set a goal of making India a USD 5-trillion economy by 2024-25 and has even unveiled a blueprint in its latest economic survey for 2018-19.

The dispensation, currently, is doing its best to address growth concerns and even the RBI is accommodative in its monetary policy stance. The unemployment woes, too, seem transient.

With solid growth expectations, India Inc. is poised to grow well in the next 5-10 years and that means you, as investors, have more than one reason to rejoice.

So, don't miss out on the potential to boost your mutual fund portfolio returns by adding a worthy set of Alpha Funds to your investment portfolio.

Editor's Note: To help you find the best equity funds with high alpha-generating potential, PersonalFN has developed a 'SMART Alpha Score' model.

With optimum weightage to each parameter, which we consider important in identifying fundamentally strong equity funds that hold the potential to generate alpha, this model helps us zero-in on quality names that have the ability to trump the benchmark and generate alpha returns for investors in the long-term.
 

​​In our latest exclusive - The Alpha Funds Report - 2019, we have identified five high alpha generating funds that are 'high risk-high reward' investment opportunities in the Modi 2.0 regime.

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