Reduce exposure to mid-cap funds: Keep 75% in large and multi caps

Several mid- and small-cap schemes have risen between 50% and 70%

The best way to make money in the market is to buy low and sell high. But, the best of pundits have got their timing wrong, and there’s no reason retail investors should fare any better.

With the markets hovering near all-time highs, what should mutual fund investors do? Experts suggest that investors should remain invested in equities but calibrate asset allocation based on one’s risk appetite. 

“There is no point in trying to time the market,” says Chandresh Nigam, CEO, Axis MF. “Choose products that suit your risk profile and continue investing through systematic investment plans (SIPs). Be in funds that are focused on creating long-term value, rather than those that are looking for short-term play.” Financial planners are advising their clients to stay put with their monthly installments. “Stopping SIPs altogether could tantamount to market timing. Many analysts are expecting the market to tank since 2016 but that has not quite materialised. The most important thing is to invest regularly rather than get the timing right,” said Suresh Sadagopan, a financial planner.

SIPs work on rupee cost averaging and is in effect a long-term investment vehicle. This means during times of steep corrections, the SIP amount can fetch a higher number of mutual fund units. “For most investors, large- and multi-cap funds should now form 70-80 per cent of their portfolio. The rest could go into other strategies, including mid- andsmall-capp funds,” says Nigam. 

In the past one year, the BSE MidCap and SmallCap indices have gained 43 per cent and 53 per cent, respectively. Several mid- and small-cap schemes have risen between 50 per cent and 70 per cent. 

A portion of the corpus from mid- and small-cap funds can be moved into balanced funds that hold a certain component of debt. This may especially be a good option for first-time investors. Though returns may not be higher than what a pure equity scheme offers, these funds tend to be less affected during market corrections. 

Source: Value Research | Returns as on January 23, 2018; AUM as on December 31, 2017

Sectors or thematic funds should not be more than 10 per cent of one’s portfolio. In times like these, however, investors should reassess their sector bets. For instance, since banking stocks have run-up significantly in the past year, so some amount of profit booking may not be a bad thing here. Investors can also look at pharma funds which have been underperformers for a while now and can be good defensive bets if the market tanks. Most diversified equity mutual funds have given average one-year returns of 35 per cent. This may be unsustainable in the near term. 

Sadagopan says investors should resist the urge to put their money only in the top performing schemes. “Investors need to know who the fund manager is, the risks that he is taking to generate the returns and the categories that will do well in the current market environment. Investing simply based on one-year returns can be a mistake,” he observes.

In certain times investors may need handholding and it may be prudent to route one’s investments through a financial planner or advisor.