Mutual Funds: What should be your portfolio mix now?

By Jimmy Patel

Recently, the Association of Mutual Funds in India (Amfi) released its monthly data for November 2019, and it revealed equity inflows plunged to a 41-month low. In comparison to the last couple of months, lacklustre participation across most categories of equity mutual funds dragged the total inflows in equity funds.

Large-cap funds, mid-cap funds, multi-cap funds, and focussed funds continued to witness inflows through both the lump sum and SIP modes of investing in November 2019, but it was noticeably lower in comparison to the previous months. In certain categories, investors also preferred to book profits.

That said, the Average Asset under Management (AAUM) of the Indian mutual fund industry continued to grow strong (Rs 26.94 lakh crore as of November 30, 2019 vis-à-vis `26.14 lakh crore in October 2019). And if we assess over a span of 10 years, there has been nearly a three-and-half fold increase AAUM.

Cautious investors

So, what is making investors turn cautious now?

The Indian equity market entering a new stratosphere (an all-time high), particularly when the economy is slowing down, is not perceived as very comforting by investors because the margin of safety appears to have narrowed. The trailing 12-month P/E of the S&P BSE Sensex and the S&P BSE large-cap index has moved up to 29x and 28x, respectively.

Clearly, these levels are not cheap. In fact, it is in the overvalued zone offering a limited margin of safety. Yet, recognising that high bouts of volatility cannot be ruled out and patience could be tested in the journey of wealth creation, investors are rightly opting to SIP into mutual funds.

SIP inflows, in fact, touched a new high of `8,273 crore in November 2019 and the SIP AUM streaked to a new all-time high of Rs 3.12 trillion. The AMFI data shows that the industry has added, on an average, 9.55 lakh SIP accounts each month during FY 2019-20, with an average SIP size of about `2,800 per SIP account. Currently, the industry has about 2.94 crore SIP accounts.

Thanks to the Mutual Funds Sahi Hai campaign started by Amfi in March 2017, the popularity of SIPs is growing. People are recognising the benefit of investing in mutual funds via SIPs—the rupee-cost averaging, the needed discipline it instils without having to worry about the day-to-day volatility or timing market, and how it serves as an avenue to accomplish long-term financial goals.

Strategic funds

Investors are taking the risk and deploying their hard-earned money in equity mutual funds in pursuit of better returns, amidst a time where the real rate of return clocked by traditional instruments such as bank fixed deposits do not seem very effective from a financial planning point of view. Care should be taken to build a strategic portfolio of equity mutual funds that can clock an effective ‘real rate of return’ (also known as inflation-adjusted return).

In the current scenario, it would be wise to take exposure to multi-cap funds, while holding some proportion of your equity allocation in large-cap funds as well as mid-cap funds. This is because, large-caps are established names, and the biggest advantage of having them is the stability they can provide to your portfolio.

Large-cap funds should ideally be a part of the core holdings of your portfolio. Whereas to clock higher returns by assuming very high risk, mid-cap funds can be a part of your satellite portfolio provided you have an investment time horizon of over five years. The mid-cap and small-cap indices are attractively placed at lower trailing P/E level than before, offering a reasonable relative margin of safety.

The writer is MD & CEO, Quantum Mutual Fund

Source: Financial Express