Fund managers advise large cap, balance funds for 2017

India's equity fund managers are advising investors to stick to large cap funds and limit or avoid exposure to mid and small cap stocks in 2017 as the year is expected to be volatile.

According to fund managers, large cap funds not only offer higher safety on the relative basis, particularly during high volatility. Such funds restrict their investments to blue-chip companies.

Investors with a low-risk appetite can look at balanced funds with dynamic asset allocation, say money managers.

The average one-year return for large-cap equity schemes has been around 20 per cent. The recent rally in stock prices has improved the performance. The Nifty 50 index has rallied around 10 per cent from its December 2016 lows.

Manish Gunwani, deputy chief investment officer (CIO) of India's largest fund house ICICI Prudential Mutual Fund, says, "We believe large caps currently are in a moderately attractive territory when compared with mid and small cap space. As capacity utilisation improves, large cap names can be among the first to gain, from the change in market cycle."

Large cap companies are generally associated with better liquidity, are well researched, and are managed by promoters or management with good track record. This helps infuse a sense of comfort and safety among investors.

Harsha Upadhyaya, CIO, Kotak Mutual Fund, says, "Large cap stocks are inherently less volatile as compared to mid and small cap stocks, as their businesses are generally quite evolved to sail through business vagaries. Within active equity mutual funds, large-cap schemes are least volatile and are relatively safer bets."

In the past one year, however, mid-cap and small-cap schemes have outperformed large cap funds.  One year average return for midcap and smallcap schemes is 26 per cent and 30 per cent, respectively.

Fund managers feel the outperformance may not continue going ahead and investors should restrict exposure to these schemes.

Janakiraman R, vice president & portfolio manager – Franklin Equity, Franklin Templeton Investments, says, "I will advise investors to either avoid or limit exposure to the mid-cap space. The year 2017 may be a more challenging year than it was in 2014. One needs to be cognizance about the current valuations across the category and what returns can be made, say, in the next 2-3 years. If one has an investment horizon of five years or more, which generally takes care of the risks in the stock markets, it's preferable to have two-thirds of exposure to large caps and rest to mid-caps."

According to Upadhyaya, "At the index level, midcap index has been trading at a premium to large cap index. However, there exist a lot of businesses in the mid and small cap segment which are still outside the index and are available at relatively better valuations. Portfolios focussing on such stocks with adequate diversification are still likely to deliver better point-to-point returns than large cap portfolios over the long term, provided investors are ready to take possibly higher intermittent volatility."

Though large cap and mid cap portfolios have their own risk-reward ratios, another segment which can well be looked after by investors is the balanced fund category, and funds that have in-built dynamic allocation processes. Balanced funds - which typically invest both in debt and equity assets - do well in times of uncertainties and help investors conserve the value of their investments.

"Dynamic asset allocation funds is another category which investors can opt for considering the probable volatility that capital market is likely to face in the months ahead," adds Gunwani.

According to him, balanced and dynamic asset allocation funds are recommended for an individual who wants to participate in both debt and equity market, but with relatively lower volatility. Hence, in times of uncertainty, like the prevailing market conditions globally, these funds are better placed to take advantage of the opportunities available across equity and debt instruments," he says.

Upadhyaya echoes the same."Recent trends in mutual fund industry show that many retail investors prefer to carry out asset allocation into equity and debt through balance funds rather than investing in separate sets of funds. Balance funds are relatively conservative as compared to equity funds due to their asset class diversification, and are suitable for investors preferring to take moderate risk."