Equity mutual funds have been the pariah for investors for some time. But maybe it is time to change. The sentiment has turned positive in the equity markets following the reforms announced by the government and easing of uncertainty at the global level, thanks to the steps taken in the Euro zone and the liquidity infusing measures by the US government.
Experts say that now equity across the world will be a favoured asset class. So, perhaps it is time for investors to restart investing in equity mutual funds (MFs) as well. Last week, the benchmark Sensex closed at 18,752, a level last seen more than a year ago. But while inflows from FIIs were close to $2 billion in September, mutual funds remained net sellers at Rs 2,593 crore.
According to experts Indian stocks are still reasonably valued and there is scope for further gain.
“The valuations of Indian equities are still reasonable and coupled with strong liquidity, there is some upside available,” says Kaushik Dani, an equity fund manager with Peerless Mutual Fund.
Since July, the BSE Sensex 30 Index has gained from 17,429.98 to 18,618.44, a gain of 6.8 per cent. In the same period, the NSE S&P CNX Nifty Index gained 7.2 per cent from 5,278.9 to 5,657.95.
In the last three months, the returns from the various kinds of equity MFs have been between 8.59 and 11.93 per cent.
However, retail investors, are not convinced about investing in equity funds. In August, the net outflow from equity schemes (including equity linked saving schemes or ELSS) had hit a six-month high at Rs 2,286 crore, according to statistics from the Association of Mutual Funds in India (Amfi).
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According to Surajit Misra, executive vice-president and national head, MFs, Bajaj Capital, over the last eight months MFs have only seen redemptions on most days. “But this is the early stage of a rally and going by the price/earning ratio of equity markets, it is a good time to enter for a three to five year period,” he says.
This time, too, the high net worth investors have come in quickly. But retail investors usually take time and they end up paying a price for it.
Devang Mehta, VP & head, equities sales, Anand Rathi Securities, says it is the right time to start constructing a portfolio in equity MF.
“Retail investors must look at diversified funds and the portfolio should be an appropriate balance between large and mid caps. During trying times large-caps are relatively safer and when the markets are in momentum, the mid-caps have a tendency to outperform. It is a good time to look at ETFs and diversified funds from good fund houses,” he says.
It is a good idea to begin with large-cap funds since the volatility is lower. “Although the return from a large-cap fund may be lower than a mid-cap or small-cap, the risk adjusted returns are often better. To start with investors can also look at index funds,” says Dani. It is advisable for retail investors to invest via Systematic Investment Plans (SIP) rather than try to time the markets. Exchange Traded Funds would also be a safe option if one is a passive investor & is happy with the market rate of return. So, ETFs which track Nifty or Junior Nifty are good options.
Ideally, investors should target 15-20 per cent CAGR returns for a three- to five-year horizon.
Misra advises retail investors to stay away from any sectoral or thematic fund, since that is where the highest loss of capital has happened. Last year was also when retail investors shifted loyalty to debt funds.
According to data from Amfi as on March 2012, the number of folios in debt funds increased to 45,01,302, from 39,29,341 in the previous year. In the same period, the number of folios in equity funds fell to 3,70,68,734 from 3,86,44,938.
However, though equity markets are looking better, it does not mean you should liquidate all investments in debt funds. But since interest rates are now headed downwards, investors would do well to shift from Fixed Maturity Plans to short-term or long-term funds like income funds.
Another option would be to invest in Dynamic Bond funds or Flexible Funds which invest in bonds of zero to 10 years maturity to capture positive movement in the bond market, say experts.