How to invest your money in a volatile market? Motilal Oswal draws up a plan

MOPW recommends a focus on Large Caps and Multicap funds for new equity investments

India's equity market outlook continues to remain positive given the strength of corporate balance sheets and the healthy uptrend in the capex cycle, said Motilal Oswal in a note. An analysis by the brokerage shows that large-cap companies are fairly valued, and for incremental allocation towards equity, it has suggested investing in lump-sum with a bias towards large and multi-cap funds without trying to time the market. 

The March 2024 Alpha Strategist report by Motilal Oswal Private Wealth (MOPW), focuses on stock market outlook and investment strategies. Here are the key takeaways:

Mid & Small Cap Stocks:

1. Recent earnings growth for companies outside the Nifty 50 (large-cap companies) has been sluggish.
2. Valuations for these companies (mid- and Small Cap) are currently higher than their historical averages, suggesting a potential correction.
3. MOPW advises caution when investing in Mid & Small Cap stocks due to the possibility of their valuations decreasing in the future ("mean reversion").

Large Cap Stocks & Investment Strategy:

1. The Indian stock market remains positive overall, supported by strong corporate finances and rising investments (capex).
2. Large-cap stocks (Nifty 50) are considered fairly valued by MOPW.
3. MOPW recommends a lump-sum investment approach with a bias towards Large Cap and Multi-cap mutual funds for new equity allocations.
4. They emphasise the importance of a well-defined investment plan (Investment Charter), proper asset allocation, and a disciplined investment strategy, avoiding attempts to time the market.

Fixed Income Portfolio Strategy:

1. MOPW suggests increasing the duration of fixed-income investments (bonds) to benefit from potentially falling interest rates in the next 1-3 years.
2. The recommended allocation is: 65-70% in government bonds (G-Secs) with maturities ranging from 10 to 30 years. This can be done directly or through G-Sec mutual funds.
3. Up to 30-35% in other options for potentially higher yields, including high-yield corporate bonds (NCDs), private credit, and real estate/infrastructure investment trusts (REITs/InvITs).
4. A small portion for short-term debt instruments for easy access to cash.

"To improve the overall portfolio yield, can be allocated 30% – 35% of the overall fixed income portfolio to select high yield NCDs, Private Credit strategies & REITs/InvITs. For liquidity management or temporary parking investments can be allocated to Arbitrage/Ultra or liquidity management or temporary parking, Short Term (minimum 6 months)/Liquid (1-3 months)/Overnight (less than 1 month) strategies," said the brokerage. 

"In the fixed income market, the long tenor G-sec yields have declined by 25-30 bps over the last 3-4 months without any interest rate cut from the RBI. Foreign investors have increased the pace of buying domestic G-secs after the inclusion in the JP EM Bond index. The recent inclusion in the Bloomberg EM Index paves way for more global participation. For incremental investments in fixed income portfolios, we suggest that 65-70% should be invested in a combination of (i) High quality (G-Sec/AAA equivalent) roll down strategies through a combination of 10-14 year maturity Bonds/Funds, (ii) Multi Asset Allocation Funds which aim to generate efficient risk adjusted returns through a combination of debt instruments & arbitrage (equity and commodities), (iii) Equity Savings funds which aim to generate enhanced returns than traditional fixed income along with moderate volatility through a combination of equities, arbitrage and fixed income instruments," said the brokerage.

Allocation to Gold can act as a hedge against any heightened volatility in a portfolio constituting risk assets.

Where should you park your money? Here is a recommendation list by Motilal Oswal

For equity savings funds, these are the following recommendations: 

• Aditya Birla SL Equity Savings Fund-Reg(G)
• HDFC Equity Savings Fund(G)
• ICICI Pru Equity Savings Fund(G)
• Kotak Equity Savings Fund(G)
• Mirae Asset Equity Savings Fund-Reg(G)
• SBI Equity Savings Fund-Reg(G)

Arbitrage funds 

Aditya Birla SL Arbitrage Fund(G)

Bandhan Arbitrage Fund-Reg(G)

HDFC Arbitrage-WP(G)

ICICI Pru Equity-Arbitrage Fund(G)

Invesco India Arbitrage Fund(G)

Kotak Equity Arbitrage Fund(G)

Mirae Asset Arbitrage Fund-Reg(G)

Ultra short term funds ( for emergency cash) 

Aditya Birla SL Savings Fund-Reg(G)

HDFC Ultra Short Term Fund-Reg(G)

Bandhan Ultra Short Term Fund-Reg(G)

Kotak Savings Fund(G)

Multi Asset

Edelweiss Multi Asset Allocation Fund-Reg(G)

WOC Multi Asset Allocation Fund-Reg(G

Liquid overnight funds 

Aditya Birla SL Overnight Fund-Reg(G)

HDFC Liquid Fund(G)

HDFC Overnight Fund(G)

ICICI Pru Liquid Fund(G)

ICICI Pru Overnight Fund(G)

Bandhan Liquid Fund-Reg(G)

Kotak Liquid Fund-Reg(G)

Kotak Overnight Fund-Reg(G)

Long term: 

BHARAT Bond FOF - April 2030 -Reg(G)

BHARAT Bond FOF - April 2031 -Reg(G)

BHARAT Bond ETF - April 2033

HDFC Nifty G-Sec Sep 2032 Index Fund-Reg(G)

HDFC NIFTY G-Sec Jun 2036 Index Fund-Reg(G)

HDFC Long Duration Debt Fund-Reg(G)

Nippon India Nivesh Lakshya Fund(G)

Here is a snapshot of the brokerage's investment strategy based on your time horizon 

For a multi-asset strategy with a 3-year investment horizon, it recommends Edelweiss Multi Asset Allocation Fund if you are conservative and White Oak Multi Asset Allocation Fund if you have moderate risk. 

For a 3-year plus investment horizon, Motilal Oswal has the following Large Cap fund recommendations: 

Aditya Birla SL Focused Fund, Aditya Birla SL Frontline Equity Fund,HDFC Top 100 Fund, Mirae Asset Large Cap Fund, Motilal Oswal Large Cap

For a multi-cap strategy for 3+ years it recommends: Buoyant Opportunities Strategy PMS Motilal Oswal Growth , Anchors Fund I Motilal Oswal Growth Anchors Fund II , , Buoyant Opportunities AIF, Marathon Trend Following PMS,Renaissance Opportunities, Renaissance India Next, Motilal Oswal Growth Anchor Series III, Motilal Oswal Growth Anchor PMS, 360 ONE Focused Equity, Mirae Asset Helios Flexi Cap, MultiCap Fund, WhiteOak Capital Flexi Cap, ICICI India Opportunity, Motilal Oswal Large Cap Bandhan , Sterling value fund, Franklin India Flexicap. 

If the focus is stable returns with low risk, it recommends the following Balanced Advantage Funds: Aditya Birla SL Balanced Advantage Fund, ICICI Pru Balanced Advantage Fund, HDFC Balanced Advantage Fund, Kotak Balanced Advantage Fund

Alternatives 

15 Months+ Long – Short fund: Avendus Absolute Return Fund

3 years: Hedge against volatility Gold Funds/ETFs: Sovereign Gold Bonds, Kotak Gold ETF, Kotak Gold Fund

3 years+ Invest in domestic real estate REITs Mindspace REIT, Brookfield REIT, Embassy REIT, Nexus REIT

3 years+ Invest in Power Transmission Assets InvITs Indigrid InvIT, Bharat Highways InvIT