As the Nifty50 index inches closer to the significant milestone of 20,000, investors are curious about the potential growth prospects of their equity mutual funds (MFs). Optimistic about the market outlook, MFs are adjusting their portfolios in response to the changing macro-economic conditions and sectoral developments.
Investors are showing increased interest in mid-cap and small-cap equities, with consistent inflows observed in small-cap equity funds since June 2022, amounting to nearly Rs 30,000 crore.
Some mid- and small-cap stocks have been outperforming the broader markets since March 2023, fueled by growing domestic investor interest. Foreign institutional investors (FIIs), on the other hand, prefer large-cap stocks and relatively liquid mid-cap stocks, with investments amounting to Rs 25,121 crore so far this month, compared to Rs 55,160 crore in June.
However, as the market reaches new highs, investors are also becoming concerned about the sustainability of the momentum. Financial experts emphasize the importance of monitoring valuations and avoiding investments in overvalued stocks or themes.
The Nifty50 and Nifty Smallcap 250 indices’ valuations may not seem excessively high, but there are pockets of overvaluation and undervaluation in certain sectors. MF managers are actively realigning their portfolios to capitalize on the attractiveness of select stocks and sectors.
For instance, the ICICI Prudential Balanced Advantage Fund has reduced its net equity exposure to 40 percent in June 2023, down from 52 percent in March 2023. Managers have been selectively buying stocks of non-banking finance companies (NBFCs) to benefit from potential interest rate declines, increasing credit demand, and better valuations. Similarly, sectors like pharmaceuticals, which have underperformed recently, are seeing increased interest due to their relatively attractive valuations in specific sub-segments.
Regarding equity allocation, large-cap funds have significant allocations to financials, consumer staples, and energy sectors. However, they are under-represented in the information technology sector, which holds 11.35 percent weightage in the Nifty 100.
The equity market outlook released by Invesco Mutual Fund suggests that Indian equities are becoming one of the best investment destinations with a 3-5 year timeframe. While mid/small cap space presents significant opportunities due to the strength of the domestic economy, the rally is expected to extend to larger market segments, making flexicap/large cap segments more attractive as well.
With the dollar index weakening and expectations of limited rate hikes by the US Federal Reserve, emerging markets like India may attract more investment inflows. However, there is always the possibility of market corrections, and investors should consider their strategies accordingly.
For long-term investors, continuing staggered investments is advisable, but those with financial goals coming due in the next 2-3 years should consider securing some profits from their equity portfolios to protect their capital. However, investors should not stop their systematic investment plans (SIPs).
For under-invested or new investors, this remains a favorable time to enter the market, but a commitment to a minimum of five years is recommended. Experts suggest considering multi-cap funds and flexi-cap funds through SIPs and STPs as they require minimal intervention and are tax-efficient due to regular rebalancing of allocations to large-, mid-, and small-cap stocks.
While small-cap funds have performed well, investors should exercise caution and avoid over-investing in them due to their inherent volatility. Chasing hyped stocks or momentum-based investments without a long-term holding capacity may not be prudent.
Instead, savvy investors are advised to consider diversified equity funds with a focus on ‘value investing.’ Additionally, sector funds investing in information technology and pharmaceuticals are recommended for those with a longer investment horizon of 3-6 months.
Finally, a well-diversified portfolio across various asset classes can be advantageous, particularly as interest rates are believed to have peaked.