War creates Winner – MF perspective

War creates Winner. Make sure that you invest in Warriors. Mutual Funds are fighting like warriors in these challenging times and are likely to emerge winners in the long run.

Currently, it is a war between the equity and debt markets, as these markets are poised to breakout in the medium-to-long term. May be both would breakout at the same time. Therefore, it is important as an investors looking to beat high inflation, to keep pace with the growing demand for better lifestyle and increasing prices for better living. One can do it cautiously by having ideal asset allocation across products and sectors.

 

 

Today, inflation is more than 8%, fiscal deficit is on the higher side, GDP growth is constantly dipping, and Fitch, S&P, and other credit rating agencies are contemplating India’s credit rating downgrade. Further, given government’s inaction on reforms or policy, the country is left in despair. However, we see bright light at the end of the tunnel.

 

 

A thumb rule, which usually worked well for investors, was to invest when most of the common investors are moving away from the markets even on low to moderate valuations and peak point of interest rates. Today, although markets are at a five-year high, we should not forget that they have only achieved this based on the position created five years ago. During this period, although there were some quarters with lower and sometimes negative growth, Indian companies have still registered descent growth well above what they achieved five years ago. Considering the current valuation, markets look moderately valued and provide investors with considerable opportunities in terms of future. Nifty stocks are well positioned, with Nifty’s current trailing P/E levels of 18x, expected to deliver above-average returns in the long term.

 

 

On interest rates, there is consensus that for now, vertical movement of interest rates has almost ended and soon RBI would start pulling down interest rates to push credit growth. Coupled with this, if government acts faster on the reforms process in next one year, we could expect some good news on FDI and capital market inflows. Although RBI’s hands are tied on lowering interest rates due to high fiscal deficit and high inflation, the government could control inflation by working on the supply side.

 

 

RBI is likely to lower interest rates, as inflationary pressure settles, which would augur well for the economy. Once consumption starts moving upward, it will result in positive numbers for some frontline sectors. Fall in interest rates would also help the debt markets deliver double-digit returns. From the current focus of short-term papers, markets would move towards medium-to-long term papers, creating better demand for long-term bonds.

 

 

Mutual Fund Performance

 

 

☸     In the past three months, on an average, equity-diversified funds have delivered more than 11% returns and large-cap funds were able to deliver around 10% returns.

 

 

☸     Among sector funds, IT sector generated more than 16.1% and the banking and finance sectors delivered more than 11.7% returns.

 

 

☸     Banking funds are expected to do well in the long term, once banking reforms are in place and credit growth starts picking up.

 

 

☸     Among debt funds, ultra short-term funds have given around 9% average returns in a year and are expected to clock descent returns in the coming months due to  RBI’s current stand on interest rates.

 

 

Although there could be fluctuations in the economic growth leading to volatile markets, this is only likely to create a good opportunity for investments for long-term gains.

 

 

War creates winners, but this war between economic growth, deficit, inflation, and interest rates is expected to benefit the equity and debt markets soon. You have to invest in both the equity and debt markets in a descent proportion and the best way is through the mutual fund route.

 

 

We recommend investing certain allocation into pure equity funds, which is further divided into large-cap, mid-cap, flexi-cap, and sector funds. Further, some proportion should be invested across income funds and short-term plans with some percentage of it holding as cash component in liquid funds to add to your equity investments in case of some correction with 2-3 years investment horizon.

 

 

Talk to our ‘Financial Advisor’ to get insights on your risk profile, ideal asset allocation, and best-suited portfolio of mutual fund schemes.

 

Nov 13

 

Happy investing.

Manish Tawde
Financial Planning & Product Research

Disclaimer: Investment in securities market are subject to market risks, read all the related documents carefully before investing.

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