The last six months have seen a sharp run-up in broader financial markets, with a surge in investor enthusiasm driving up stock prices. However, with this meteoric rise, several mid and small-cap stocks now find themselves trading at expensive valuations. As a result, we’ve already witnessed upwards of a 7-8% correction in index levels, and some individual stocks have experienced even higher declines. The benchmark Nifty 50 lost nearly 3 per cent in October, recording its worst month in 2023 so far. So investors should be cautious about hiking allocations into small-caps, given the recent rally and volatility in markets.

In these turbulent times, the question that looms large is whether we can expect further corrections and what strategies investors should consider to navigate this uncertain terrain.

Volatility, a Constant Companion

Volatility remains a constant companion in the world of investments, and its persistence can often be attributed to various macroeconomic factors. Despite the recent market corrections, another 5-10% drop cannot be ruled out in the normal course of events. This unpredictability is why astute investors are reevaluating their portfolios to mitigate potential risks while continuing to seek opportunities.

Large Caps: A Safe Haven

One strategy gaining momentum is shifting allocations towards large-cap stocks. Large-cap stocks have underperformed in the last two years compared to their mid and small-cap counterparts, making them relatively more reasonably valued. When the markets exhibit signs of instability, investors tend to flock to the safety of large-cap stocks.

Large-cap companies, typically characterized by their stability, global reach, and well-established business models, tend to be less volatile than smaller counterparts. They often have the financial strength to weather economic downturns and may offer dividends as an additional source of income for investors. The current preference for large caps stems from the idea that they might prove to be a sanctuary in the storm, providing investors with more stability in turbulent times.

Also Read: Is It a Good Time to Invest in Small Cap Funds Now?

Mutual Funds: A Smarter Approach

Mutual funds have long been a favored investment vehicle for diversification and professional management. As per AMFI data, October witnessed the highest net SIP additions to date, with 17,08,866 new SIPs and 34,66,354 new registrations. Notably, SIPs now constitute a larger share of inflows, indicating a structural shift. The large-cap category experienced a noteworthy resurgence, reflecting broader market recovery. SIP numbers demonstrated consistent month-on-month growth, underscoring the strength of systematic investment plans. Looking ahead, we can anticipate continued inflows into large, mid-cap and small funds, given the untapped potential in these segments. The high SIP account openings indicate a growing and committed investor base.

In the current scenario, investors can look at balanced advantage funds and multi-asset funds to navigate the treacherous waters of the stock market.

Balanced Advantage Funds: These funds offer the flexibility to allocate assets dynamically between equity and debt, allowing fund managers to adjust the fund’s risk profile based on market conditions. As volatility in the market increases, these funds can strategically shift towards a more conservative approach, helping to protect investors’ capital.

Multi-Asset Funds: Multi-asset funds take diversification to the next level by investing across different asset classes, including equities, debt, and sometimes even alternative investments like gold. They can provide a unique benefit in the current environment, with geopolitical concerns remaining a significant factor. Geopolitical events often lead to market turbulence, and investors can find solace in knowing that a portion of their investments in multi-asset funds is allocated to assets like gold, which historically has acted as a hedge during adverse events.

Gold as a Hedge

Gold has long been considered a safe-haven asset in times of uncertainty. Its value tends to rise when traditional financial markets experience turbulence. Geopolitical concerns, economic crises, and inflation worries all drive investors to gold as a hedge against adverse event risk. Multi-asset funds can offer a strategic advantage in this regard, as they typically include an allocation to gold.

Also Read: Stock Market vs Mutual Funds: What’s the best investment option for higher returns?

Diversification, the Golden Rule

Diversification is a fundamental principle in risk management and wealth preservation. In today’s market climate, where macro factors are injecting uncertainty and volatility into the equation, diversification becomes even more crucial. By spreading investments across different asset classes, investors can reduce the risk associated with individual assets or sectors. This approach can help balance out the ups and downs in a portfolio and potentially improve long-term returns.

Conclusion

In the midst of a volatile market, investors are presented with a challenging landscape to navigate. After a remarkable run-up in broader markets, mid and small-cap stocks now appear overvalued, and corrections have already begun. The possibility of further market turbulence cannot be dismissed, and investors must adopt a strategic approach to protect and grow their investments.

Shifting allocation towards large-cap stocks, which have been relatively undervalued in recent years, is one strategy to consider. Large-cap stocks offer stability and the potential for dividend income, which can be reassuring in uncertain times.

Mutual funds, particularly balanced advantage and multi-asset funds, provide an effective way to navigate the market’s ebbs and flows. These funds offer flexibility and diversification, allowing investors to adapt to changing market conditions while benefiting from professional management.

Furthermore, multi-asset funds, with their allocation to gold, can provide a hedge against geopolitical concerns and adverse events, offering a level of security in turbulent times.

Therefore, as we face an unpredictable investment landscape, a proactive strategy that combines diversification, allocation to large-cap stocks, and the use of mutual funds, especially multi-asset funds, can be a prudent approach to safeguard and enhance your investment portfolio. Ultimately, every investor’s risk tolerance and financial goals should guide their investment choices, and consulting with a financial advisor is often a wise decision in these uncertain times.

This article has been written by Vivek Goel, Co-founder and Joint Managing Director at Tailwind Financial Services, a wealth management platform.

Disclaimer: Views expressed above are personal opinions of the author. Readers are advised to consult their financial advisors before investing in mutual funds