MF action plan for 2018

Some guidelines to help you make sound choices and keep investments going

It’s that time of the year when you review your financial goals and re-jig your portfolio. We bring you five themes to keep in mind while picking your funds.

Time to temper expectations

Purely on fundamentals, there hasn’t been much reason to cheer in 2017. Corporate earnings are yet to witness a convincing and sustainable recovery, though there have been pockets of growth. Interestingly though, the broader market did well, with the Sensex gaining around 27 per cent year-to-date. With the mid-cap space still buzzing with interest, other indices outperformed the Sensex smartly — the Nifty 500 gained 34 per cent while the CNX Midcap 50 rallied 46 per cent.

Diversified equity funds mirrored these trends, with large-cap funds delivering 32 per cent returns as a category, while mid-cap funds delivered a stellar 41 per cent return. Multi-cap funds, which invest across market capitalisation, gained 35 per cent.

With valuations sky-rocketing, particularly in the mid- and small-cap space, markets are likely due for a correction in 2018. Remember, abundant liquidity in the market was the key driver for the market in 2017. With liquidity to moderate and earnings to take centre stage, a repeat of the 2017 performance is unlikely. Hence investors need to temper their expectations as far as mutual fund returns go.

Don’t stop investments

If you are looking to build a portfolio for the long term, one that beats inflation, then short-term blips in the market should not bother you. While equity funds may not deliver spectacular returns in 2018, they remain the best way to build wealth over the long run.

In the lacklustre markets of 2013, 2015 and 2016, while large-cap funds made negative to marginal gains, they delivered a stellar performance in the bull markets of 2009, 2012 and 2014. Thus, across market cycles over a long period of time, equity funds have managed to rake in tidy double-digit gains for investors.

What is important, though, is to pick the right funds that have a long track record of consistent performance across market cycles. Hence, even if the coming year does not promise spectacular gains, keep your investments going.

Stick with large-cap funds

The spectacular performance of mid-cap funds over the past two to three years could tempt you to move your portfolio in favour of mid-cap funds. But given that mid-caps are trading at sky-high valuations and the fact that mid-caps tend to fall harder in turbulent markets, it may be unwise to stock up heavily on mid-cap funds. Remember that large-cap funds deliver inflation beating returns and also tend to cap losses better in a volatile market.

Most large-cap funds have a mandate of investing 80 per cent in large-caps. As per SEBI’s circular on mutual fund classification (to be implemented soon), large-cap funds should have at least 80 per cent of assets in large-cap stocks (1st-t -100 th company in terms of full market capitalisation).

Aditya Birla Sun Life Frontline Equity, Aditya Birla Sun Life Top 100, ICICI Pru Focused Bluechip Equity Fund, Reliance Top 200 and Kotak Select Focus are some of the top performing large-cap funds.

The choice of funds is ideally driven by your goal and risk appetite. If your goal is to create wealth over the long run, and you are a moderate risk taker , then large-cap funds are always a good bet.

Calibrated risk in mid-caps

At this juncture, even if you have a slightly higher appetite for risk, it is best to make fresh investments in large-cap funds. This will help you cap losses better should markets correct sharply in 2018.

But if you love the adrenaline rush of investing in mid-caps, then stick with long-term consistent performers within the category.

This will ensure that the risk-return trade off works in your favour over the long run. While mid-cap funds tend to fall harder in bear markets than large-cap funds, the ability to cherry-pick the right kind of stocks, at the right time, can lead to tidy gains over the long run.

Top performing mid-cap funds have managed to deliver 26-28 per cent and 14-15 per cent return over five and 10 years, respectively, beating large-cap funds by a wide 4-10 percentage points.

Aditya Birla Sun Life Pure Value Fund, Canara Robeco Emerging Equities, HDFC Mid-Cap Opportunities, L&T Midcap and Mirae Asset Emerging Bluechip are some of the top performing mid-cap funds.

If you are not an aggressive investor but want some exposure to mid-caps, consider multi-cap funds.Aditya Birla Sun Life Equity Fund, DSP BR Opportunities Fund, Franklin India High Growth Companies, L&T India Value, Mirae Asset India Opportunities, Tata Equity P/E Fund are some of the top-performing multi-cap funds.

Avoid rate risk

If you are a conservative investor or a retiree , then go for debt funds. But do remember that while debt funds are not as risky as equity funds, a part of your initial investment can erode, nonetheless. These funds invest in various fixed income instruments such as government bonds, corporate bonds and other money market and short-term debt instruments. The NAV on the debt fund can thus rise or fall along with the underlying bond prices.

One of the key factors that impacts bond prices is interest rate movements in the economy. If interest rates move up, bond prices fall and vice versa. In 2017, yield on longer tenure government bonds moved up. Hence after raking in gains of 16-18 per cent in 2016, top long-term gilt funds (investing in long-term government bonds) managed to deliver just 5-6 per cent gains in 2017.

At the bottom of the rate easing cycle as is the case now, it would make sense to avoid investing in longer term gilt funds. Rather, a chunk of your debt fund investments should be in short-term income funds that carry less volatility in returns. These funds delivered 7-8 per cent return in 2017.

Short-term income funds and banking and PSU debt funds may be ideal for investors with medium risk appetite. Within the short term income category, Aditya Birla Sun Life Savings Fund, Aditya Birla Sun Life Treasury Optimizer, HDFC Regular Savings, HDFC Short Term Opportunities, ICICI Pru Short Term, and UTI Short Term Income are some of the consistently performing funds with relatively lower exposure to riskier bonds.

Within banking and PSU debt funds, Axis Banking & PSU Debt, ICICI Pru Banking & PSU Debt and UTI Banking and PSU Debt are some of the top performers.

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