Stock markets are currently at an all-time high and in a roaring bull market, it makes sense to stay invested in equities. However, investing in the stock market directly is fraught with risks and requires a great deal of research as well as a sound understanding of the market.
Thankfully, retail investors can also take the mutual fund route to invest in stock markets. This way their risks are minimised, apart from giving them a better chance to get good returns and grow their wealth over the long term.
However, is it also a good time to invest in mutual funds? Experts say that the nation’s economy has shrugged off the short-term disruption caused by demonetization, with forecast by the RBI for GDP growth in FY18 being 7.4%, higher than the projected GDP growth for the FY17 at 6.9%. Inflationary forces have been benign, with the April print for CPI inflation being 3%, well within inflation corridor set by the RBI. Also, “there is a sense of optimism building with monsoon predicted to be ‘normal’, expected infrastructure spends by the government, implementation of GST, empowerment of the RBI by the government to resolve the NPA issues plaguing the banking sector, and pickup in construction activity from the push provided by the government to affordable housing,” says Sachin Relekar, Fund Manager-Equity at LIC MF.
A favorable macro environment, thus, augurs well for the stock market, making it an opportune time to invest in the equity markets. “And with teams dedicated to fundamental equity research, mutual funds provide an ideal conduit through which investors can gain exposure to the equity markets,” says Relekar.
How and where to invest?
For small and individual investors, a systematic investment plan (SIP), where an investor invests a fixed amount of money every month, is the best way to invest in mutual funds. To create long-term wealth, investors need to focus strongly on the quality and type of mutual funds they invest in keeping in mind the risks associated with those underlying asset classes. Experts also advise investors to diversify their holdings and follow their long-term capital allocations religiously, and not be swayed by the current market volatility and noise.
The selection of mutual funds, however, should be in line with the investment objectives of the investor in order to maximize the benefits. Various investors have different investment expectations. Desired outcomes come when the investor expectations match with the fund investment objectives.
Hence, “there is no ‘one size fit all’ concept in selecting the best mutual fund. One, therefore, needs to consult a good qualified advisor trained to deal with mutual funds, who can help you to set your financial goals and expectations and then recommend best mutual fund to meet them. For example, for short-term goals, you can invest in a liquid fund, which has low risk and returns with great flexibility for redemption. For the medium term, you can invest in a balanced fund, and for the long term you can invest in equity-oriented funds. Similarly, if you are investing to save tax, then allocate towards an ELSS fund,” advises Relekar.
In the current scenario, however, some experts advise to go for equity mutual funds. “Equity mutual funds are the best to invest in at the moment because of the prevailing conditions. However, within equity, the valuations of midcaps seem overstretched at a PE ratio of 26 and the returns delivered by midcap funds can be volatile in the future in comparison with large cap funds,” says Tejas Khoday, Co-Founder & CEO, FYERS, an online investment platform for young millennials.
For retail investors, it makes sense to invest via SIPs in a maximum of 2 different funds. That is because investing in too many funds can result in overdiversification and overlap in portfolios, which is not a good practice for portfolio building. “Among diversified equity schemes, Birla Sun Life Equity Fund is a good choice, and among large cap equity funds, ICICI Prudential TOP 100 Fund is doing well. At this juncture, balanced funds are not lucrative due to the low interest rate scenario (Balanced funds invest 35% of the total AUM into bonds and debentures),” informs Khoday.
Kaushlendra Singh Sengar, Founder & CEO, Advisorymandi.com, however, recommends investors to invest in equity-infrastructure direct plan growth funds, for an investment horizon of minimum 2-3 years. According to him, the Union Budget 2017 was all about infrastructure and allocated Rs 3.96 trillion for the infra sector to spur economic activities and create more jobs. Moreover, GST will also give a boost to the transportation industry. The government has also planned a Rs 4,000-cr overhaul of 80 check posts across the country to ensure seamless flow of goods under the GST regime. These measures will give a big boost to the infrastructure of the country.
He, therefore, recommends two plans: (1) IDFC Infrastructure DP (Direct Plan) (G), which has given 55.54% return in the last one year and 28.63% return in the current year.
2) SUNDRAM Infrastructure Advantage Fund DP (G), which has given 29.25% return till yet this year.
Whatever be the case, experts say that equity mutual funds may be used as a long-term wealth building instrument. That is because by the virtue of their diversification policies, it takes time to deliver meaningful returns. However, if you are aggressive, you could also explore thematic investing.