Markets At An All Time High! What Can Mutual Fund Investors Do?
Apr 03, 2019

Author: PersonalFN Content & Research Team

(Image source: pexels from pixabay)

Have market experts got it wrong for one more time?

Until recently, they claimed that the markets were preparing for a big slide; on the verge of slipping into a global recession. Suddenly, a big spurt of liquidity invigorates the markets.

No cheers for this all-time high?

Indian markets have been rallying for over a month, without any major fall.

Many of you might be unaware that the Indian markets were just catching up with the global markets.

In the last one month, Indian markets have outperformed major global markets, including some prominent emerging markets.

Table: Will Indian markets lead the rally in global equities?

Scheme Name Absolute (%) CAGR (%)
January-March 2019 Quarter 1 Month 6 Months 1 Year 2 Years 3 Years
S&P BSE SENSEX 7.2 7.8 6.8 17.3 14.4 15.8
NIFTY 50 7.0 7.7 6.3 14.9 12.7 15.2
Shanghai Composite 23.9 5.1 9.5 -2.2 -2.4 1.9
FTSE 100 8.2 2.9 -3.1 3.2 -0.6 6.0
CAC 40 13.1 2.1 -2.6 3.5 2.7 7.0
RTS Index 12.1 0.8 0.5 -3.9 3.2 12.4
Dow Jones Composite Index 11.5 0.4 -2.4 6.3 9.7 11.1
DAX 9.2 0.1 -5.9 -4.7 -2.8 5.2
Dow Jones 11.2 0.0 -2.0 7.6 12.0 13.7
Bovespa 8.6 -0.2 20.3 11.8 20.7 23.1
Data as on March 29, 2019
(Source: ACE MF)

If you closely look at the performance of the Indian markets vis-a-vis global markets, the former has underperformed in Q1 of Calendar Year (CY) 2019.

Again, in the 1-year timeframe, Indian markets have done reasonably well.

Nonetheless, no other prominent indices are at an all-time high, except for CNX Nifty 50 and S&P BSE Sensex.

Does this mean Indian markets are leading the movement in global equities?

For now, speculating about it does not hold any merit.

However, the ground reality is quite different. Midcap indices are still 10%-12% away from its all-time high. Small cap indices are 25% short of their all-time high.

It's getting even tougher to predict what's next, right?

The present market rally, based on certain assumptions, currently factors in many positives that might unfold in future.

Expectations/assumptions that might have driven the Indian markets include:

  • Stable government at the centre and there's a likelihood of the Modi government getting the second term.

  • The Modi government will fast-track large infrastructure developmental project in its second term. This might encourage the private sector Capex cycle.

  • Globally, interest rates are sliding lower. The U.S. Federal Reserve (Fed) is done with the hawkish monetary policy stance. Some market observers believe, the U.S. Fed will be forced to cut interest rates in the foreseeable future.

  • RBI will change its policy approach from neutral to accommodative.

  • Money might move away from Developed Markets (DMs) to Emerging Markets (EMs) and India would be a big beneficiary of this trend.

But, is this already evident?

What is noteworthy...

Indian markets, after a poor show in 2018, had some bright spots regarding valuations. Unless corporate earnings rise, as expected, this market will suddenly look highly overvalued again. In India's context, elections haven't mattered much for growth in corporate earnings. However, unstable governments have plagued the growth rate.

Markets are not probably factoring in the reason why developed economies are slashing rate-they are seriously concerned about growth-regardless of the reasons stated for official records.

What investors shall make out from the surprise rally?

Timing the market is a bad deal for mutual fund investors for this reason. Usually when you realise markets are looking strong, it's often too late to enter. Similarly, by the time you realise it's time to sell, your investments are already down significantly. Hence, you should ignore market movements.

Follow a personalised asset allocation that considers your financial goals and risk appetite.

If you wish to make the most from market volatility, follow core and satellite strategy and invest in Systematic Investment Plans (SIPs) offered by mutual funds. Also, prefer direct plans to optimise your returns.

So are you wondering if there's any way to benefit from such surprise rallies without running the risk of mistiming the markets?

Follow 'Core and Satellite' approach to make the most of such situations...

The 'Core and Satellite' investing approach is a time-tested strategy to build your investment portfolio. For the mutual fund investors, the 'core portfolio' should consist of large-cap, multi-cap, and value funds, and the 'satellite portfolio' should include mid-and-small cap funds and opportunities style funds.

Benefits of following Core and Satellite approach?

  • To attain optimal portfolio diversification

  • To stay away from all market noise without letting your portfolio suffer

  • To offer greater stability to the portfolio and avoid unnecessary churning

  • To benefit from the dual investment strategy

  • To create wealth and curb the downside risk to the portfolio substantially

PersonalFN believes core holdings should form 60% of your mutual fund portfolio and the rest 40% should consist of satellite holdings.

Weightage of each portfolio constituents in both 'Core' and 'Satellite' categories can make a huge difference in the end.

What matters most is the art of cleverly structuring the portfolio by assigning weightages to each category of mutual funds and the schemes picked for the portfolio.

Unless you monitor your holdings and recalibrate the weights as per the market dynamics, especially for the 'Satellite' part of the portfolio, you may not derive the real benefits of the 'Core and Satellite' approach.

Rules for creating a strategic portfolio

  • The selected funds should be amongst the top scorers in their respective categories. The portfolio should be built with a time horizon of at least five years.

  • It should be diversified across investment style and fund management.

  • Each fund should be true to its investment style and mandate.

  • They should be managed by experienced and competent fund managers and belong to fund houses that have well-defined investment systems and processes in place.

  • Each fund should have seen outperformance over at least three market cycles.

  • The portfolio should contain an adequate number of schemes in the right proportion. In short, it should carry the most optimum allocation to each scheme and investment style.

  • The number of schemes in your portfolio must be limited to seven.

  • Not more than five schemes should be managed by the same fund manager.

  • Not more than two schemes from the same fund house should be included in the portfolio

Editor's note: Are you looking for high investment gains at relatively moderate risk?

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