Sensex at Record High: What Should Be Your Mutual Fund Investment Strategy Now?

January 25, 2024 Mutual Fund

Continuing the euphoric trend from the previous year, the Indian equity market has once again scaled fresh highs in January 2024. The S&P BSE Sensex climbed atop mount 70K and peaked at 73,328 on January 15, 2024; it is currently trading near the 71,000 mark. Meanwhile, the Midcap and Smallcap index too continued to soar high and outperformed the large-cap index by a remarkable margin.

Notably, the Sensex has risen around 75% (absolute) from its pre-COVID peak, and about 180% (absolute) from its lows of the COVID-induced market crash. Such a stellar rise within a short span surprised even seasoned investors. India’s stock market has now surpassed Hong Kong to become the world’s fourth-largest stock market.

The Indian equity market touching record highs has left equity mutual fund investors grappling with a mix of excitement and apprehension.

Notably, the year 2024 is expected to be eventful with a range of domestic and worldwide factors influencing the market — varying from the upcoming general elections, interest rate actions by the RBI, and global demand growth to geopolitical tensions. So, while the bullish trend may continue, short-term volatility will be imminent.

Midcaps and Smallcaps generated wealth at a faster pace

Index values based on Rs 10,000
Data as of January 15, 2024
Past performance is not an indicator of future returns.
(Source: ACE MF, data collated by PersonalFN Research) 

The strong fundamentals of the corporate sector, government reforms, resilient economic activities, and high participation from retail investors are currently supporting the market rally. That said, it would be prudent to exercise caution as any unexpected scenario can wipe out the gains and the market rally steam may fizzle out. This is especially true for certain pockets of the market where the frenzy is driven by irrational exuberance.

This brings us to a crucial question: How to approach equity mutual funds now?

Read on to learn about the equity mutual fund strategies that investors can follow with markets at record highs:

1) Embrace diversification

It is often said that ‘predicting the market is a fool’s errand’. Hence, instead of blindly following unsolicited investment advice or focusing on star ratings of a mutual fund to select mutual funds, investors should consider creating a diversified portfolio of various sub-categories of mutual fund that aligns with their investment objectives. Investors may use the ‘Core & Satellite’ approach to diversify their portfolio and earn optimal risk-adjusted returns.

The ‘Core’ part of the portfolio can comprise long-term steady compounders of wealth such as Large Cap Funds, Flexi Cap Funds, and Value Funds. Meanwhile, the ‘Satellite’ portion can include tactical allocation in opportunistic bets having high returns potential, for instance Mid Cap Funds, Small Cap Funds, Sector/Thematic Funds, etc.

Depending on their financial goals, risk appetite, and investment horizon, investors can suitably decide the weightage in the various sub-categories in their portfolio. Diversifying will allow the portfolio to weather the ups and downs of the market and investors can benefit from steady returns across market phases without attracting undue risks.

[Read: Diversification in Mutual Fund Portfolio-The Secret to Long-Term Investing Success]

2) Adopt a staggered approach

With markets trending at record highs, the margin of safety has narrowed. Therefore, investing a lump sum amount can be risky if the market corrects hereon. Moreover, investing a lump sum amount requires investors to time the market. However, as past market trends have proven time and again, no one can accurately time the market due to the uncertain domestic and global environment.

In such a scenario, staggering your investment over the next few months/quarters can prove to be rewarding. The SIP route of mutual funds is an effective mode for staggering investments in mutual funds. SIPs work on the simple principle of investing regularly across market conditions to compound wealth over the long run. Fewer units are purchased via SIP when the market is on an upward trend and more units are bought when there is a market downturn, which averages out the cost of investment.

Moreover, leveraging SIPs allows investors to keep emotions at bay and avoid timing the market so that their investments continue to grow and compound wealth over the long run.

[Read: 5 Key Benefits of Investing in Mutual Funds via SIP]

3) Set realistic returns expectation

Ace investor Mr Warren Buffet once famously said, ‘Be fearful when others are greedy’. This essentially means that since equity markets move in cycles, one should be cautious during market highs. One should remember that past performance is not an indicator of future returns.

While the rally has been an exhilarating experience, investors in equity mutual funds should not let emotions cloud their judgment. They should avoid getting carried away by exuberance because the market rarely moves in a linear uptrend. Therefore, it would be wise to set realistic expectations from equity mutual fund investments.

Although Mid Cap Funds and Small Cap Funds have outperformed Large Cap Funds over the last couple of years, it would be unreasonable to expect them to continue to be winners year after year. If the market corrects, Mid Cap Funds and Small Cap Funds could witness a higher downside compared to Large Cap Funds as many valuations in numerous small-sized stocks have peaked. On the other hand, Large Cap Funds can offer better stability at lower risk as they are better equipped to weather market turbulence.

4) Focus on quality

Amid the broad-based bull run seen in the last few years, most sub-categories of equity mutual funds and schemes within those sub-categories have performed exceptionally well. However, it is important to note that not every scheme is worthy of investment. As an investor, one would be better off avoiding schemes that have displayed one-off superior performance. Instead, prefer well-managed mutual fund schemes that have a long-term track record of performing consistently well across diverse market phases compared to the benchmark index and the category peers.

To determine how consistently a scheme has performed investors can analyse the scheme on various quantitative and qualitative parameters. The quantitative parameters involve analysing the scheme based on its historical returns, returns across market phases, risk-adjusted returns, and composition of the portfolio. While evaluating the performance of the scheme, one should not ignore qualitative aspects such as the track record of the fund house and the experience of the fund management team.

[Read: Relying on Star Ratings to Pick Best Mutual Funds? Read This]

5) Revisit asset allocation

Market highs often induce risk-on mode, tempting investors to chase aggressive strategies that may not suit their investment objectives. However, it is vital that investors remember their risk tolerance by sticking to the personalised asset allocation plan, and stay the course till the goal is achieved.

During market highs, investors also face the dilemma of whether to invest more or book profits. The answer to this, as always, depends on an individual’s personal circumstances and financial goals. If an investor’s financial goals are years away, then they need not exit their equity investments. However, for investors whose goals are nearing and if their portfolio is tilted towards high risk categories such as Mid Cap Funds and Small Cap Funds, they may consider rebalancing their portfolio towards relatively stable avenues such as Large Cap Funds and Flexi Cap Funds.

Likewise, they can consider diversifying across different asset classes such as debt and gold to spread their risk and sail through market fluctuations.

[Read: What Should Be Your Mutual Fund Asset Allocation Strategy Amid Rising Global Uncertainty]

To conclude…

With the equity market at record highs, investors should adopt a rational approach by maintaining a diversified portfolio and prioritising their goals. One should remember that there is no ‘one size fits all’ in mutual fund investment. With the right investment strategy that aligns with an individual’s investment objectives, one can continue to accumulate wealth even when the market is at a peak.

Thus, for long-term investors, it makes sense to continue investment even during market highs and reap the benefits of the future potential of the equity market. Investments in equity mutual funds are suitable for achieving long-term goals that are at least 5 years away, and thus short-term movements may not always require investors to take portfolio action. During market highs, investors may prefer the SIP mode of investment, which will help investors achieve their goals in a systematic and disciplined manner.

Lastly, a periodic review of the mutual fund portfolio is necessary to ensure that investors are on the right path to achieving their goals.

This article first appeared on PersonalFN here