Moderate and conservative investors can consider Balanced Advantage funds (BAF) as these are less volatile and cushion the market fall due to lower allocation towards equities. For, risk-tolerant investors, mid- and small-cap oriented funds can be interesting choice as returns could be high in the medium term, says Sachin Relekar, Senior Fund Manager, IDFC Mutual Fund.
During the period of March -May’21, equity funds have witnessed strong inflows from investors. The global financial market buoyancy and steady corporate earnings have lifted stock markets to record highs, despite the apparent negatives due to Covid-19.
Within the equity categories, arbitrage funds, international funds, thematic and balanced advantage funds saw the maximum inflows. In addition, the slew of NFOs also aided flows into equities.
In the near term, the pace of flows will depend upon various factors such as global liquidity, earnings growth, and the status of the pandemic.
We have a diversified equity fund offering with each having a differentiated strategy. The focus on value and our experience in mid and small-cap stocks have aided the performance of our funds.
The current wave of the pandemic was more severe than the previous one. Markets, however, continued to chug along, almost unconcerned. The positive outcome of the March 2021 quarterly results was overshadowed by the muted outlook for Q1FY21 in most management commentaries. One of the factors that may impact profitability across sectors is the commodity price rise – the rise over the last six months has been stupendous, ranging from 40-80%. Passing on these cost push could impact a nascent consumer recovery or severely dent the bottom line of the user industries. Such a factor may also cause the nascent cycle of the upgrade, which was strongest after December quarter 2020 results, to take a pause. Hopefully, a normal monsoon and some positive news on the Covid-19 front – vaccine supply ramping up – from July onwards could help revive economic activity around the festival season.
Investments should be guided by risk appetite and investment objectives. However, moderate and conservative investors can consider Balanced Advantage funds (BAF) as these funds seek to benefit investors by their ability to dynamically manage allocation between equity and debt depending on market conditions and the model they follow. BAFs are less volatile and aim to cushion the market fall due to lower allocation towards equities.
For the risk-tolerant investor, mid- and small-cap oriented funds can be interesting, because, despite the recent bounce, 3-year returns for mid- & small-caps could be high.
One should respect the fact that economies too, like businesses, undergo cycles. At this juncture, interest rates may be low but this does not mean that investors seek allocations to asset classes that appear to be more rewarding (ignoring the risk associated with such asset class). Irrespective of the cycle one is in, one needs to adhere to one’s asset allocation goals, risk appetite, and investment horizon. You may tweak your allocation basis the environmental setting, but it has to be within one’s tolerance limit.
Even at low-interest rates, the yield curve is such that it continues to offer opportunities at certain points namely 3-6 years, where carry adjusted for any potential Mark to market loss could still make sense.
How much should allocation be towards equity and debt is a function of one’s horizon, goals, and risk appetite. A financial adviser will be able to provide a customised approach to each client depending on his/her requirements.
Markets have been buoyed on higher hopes of earnings recovery especially in the value/small-cap segment on account of better than expected demand environment. We feel investors need to be cautious after a sharp rally as valuations have become rich. For valuations to sustain, the promise of earnings delivery has to translate into delivery of the promise; which has been elusive in the last decade.
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