Looking to invest? Hybrid and multi-asset funds are your best bet

Key recommendation for new investor for lump-sum remains Hybrid/ FOF and Multi Asset allocation schemes which can be opportunistic in reducing equity exposure or moving to other attractive asset class

Although India’s overall economic indicators look solid, stock valuations are currently not cheap, which means investors need to adopt a smart approach, favoring hybrid and multi-asset allocation schemes that can adjust exposure to various asset classes as needed, said ICICI Prudential Mutual Fund. in a note. 

Valuations are not cheap and continue to move up the curve in the Midcap & smallcap pocket

 

Focus on Key Sectors

Investment analysts at ICICI Prudential are optimistic about sectors that cater to domestic demand, such as automobiles, cement, and telecommunications. These industries are well-positioned to benefit from ongoing economic growth.

Most of the sectors trade at a premium to their historical average

 

In addition, consumption is a potential area of opportunity. Financials, insurance, and consumer staples are particularly appealing sectors for investors right now, the note added. 

Recommendations for Investors

For new investors looking to make lump-sum investments, ICICI Prudential recommends hybrid funds, fund-of-funds (FOF), and multi-asset allocation schemes. These investment vehicles offer the flexibility to shift between equity and other attractive asset classes, depending on market conditions.

"Fragile Global macros and valuations not being cheap may result in dynamic market cycles, invest in hybrid schemes with multiple and dynamic asset allocation..India’s long term structural story continues to remain intact, invest in flexible mandate schemes" it said. 

Multi-asset funds offer tax advantages as well. For starters, since they do asset rebalancing for you, you do not pay taxes whenever the fund manager moves money from one asset class to another.

Moreover,  if a multi-asset fund keeps at least 65 per cent of its money in equity or related instruments, it gets treated like an equity fund come tax time.

As per Value Research, about a third of these funds are fund of funds (FoFs). (These are funds that invest in other mutual funds). Gains from these funds are taxed differently. If you hold FoFs for over two years, you will be taxed like regular multi-asset funds. However, gains will be taxed at your applicable tax slab rate if you sell them before two years. This applies from April 1, 2025. For now, gains from such FoFs are taxed at your applicable slab rates.

"It is difficult to say if multi-asset funds will keep delivering stellar returns in future. That said, they can be a solid option to spread your money across different asset classes, especially if you are a beginner," said Pankaj Nakade of Value Research. 

Staying Alert to Market Influences

Investors are advised to remain vigilant about global events that could affect equity markets. Key factors to watch include geopolitical developments, central bank decisions, and the performance trajectory of Indian equities.

India’s economic outlook remains positive, supported by strong consumption and infrastructure growth. While the current market may seem expensive, adopting a diversified investment strategy can navigate the complexities and seize opportunities. 

How should you plan your asset allocation?

"You should start considering asset allocation after you've built a substantial amount, such as five years' worth of savings. Early on, you don't have much to lose, so focus on growing your wealth. Once you've accumulated a meaningful corpus, then it's time to think about asset allocation to protect your wealth.

The advantage of asset allocation is that it allows you to course-correct and gives you control. If the market dips, you'll have a plan to invest instead of regretting being fully invested in equity without a strategy. Essentially, asset allocation provides a logical framework for action," said Dhirendra Kumar of Value Research. 

Kumar further explained that if an investor has sufficient time in hand, he can continue with even a 100% equity portfolio. 

"As your retirement goal approaches, it's wise to gradually reduce your risk by shifting a portion of your investments into debt instruments. As for your FDs, they should definitely be factored into your overall debt allocation.," said Kumar.