In our equity outlook for 2020, we had said that opportunities lie in some pockets and that a broad-based recovery is some time off. So, where are the opportunities and what strategy can you follow?
First, start deploying. If you’ve been averse to stepping up investments because markets were high, stop waiting. Markets do not wait for concrete numbers but react to early signs of a turnaround and this is already underway as explained in the outlook.
Second, if you have a surplus to invest, invest a part of it right away. You can either invest in the funds you already own or the suggestions we have below. Maintain a portion of your surplus in cash to capture any market volatility through the year, as there may be hiccups based on data flow and global events such as the US elections, central bank actions across developed countries and the EU, and trade wars. You could also consider building up a surplus to capture such opportunities if you do not immediately have it.
Deploy into mid-caps and small-caps
Choose mid-cap and small-cap funds to first park any surplus. This market segment may not deliver immediately, but it is an opportune time to invest here from a medium to long-term perspective. Here is why.
- It has gone through two years’ correction. From price-valuation standpoint, it is far better than large-caps. Buying around the bottom of an economic cycle will work in its favour as they can benefit much more from a growth revival than large-caps. In fact, aggregate revenue and operating profit growth for mid-cap stocks have come in stronger at 6.9% and 9% respective in the September 2019 quarter than the 0.74% and 1.3% respectively for large-cap stocks.
- In the same vein, cyclical stocks and sectors can see a bigger payoff than defensives and consumption from a growth-driven investment demand revival. Several of such stocks and sectors, such as niche engineering and industrial companies, auto ancillaries, export players are present more in the mid-cap and small-cap space than in large-caps.
- Mid-cap and small-cap funds follow a stock-specific bottom-up strategy. Therefore, they may be more adept at spotting small winners than multi-cap funds even though the latter invest across market cycles. This apart, mid-cap and small-cap funds have lesser portfolio overlap than multi-cap and large-cap funds. Existing large-cap exposure through multi-cap and index funds will be sufficient to provide exposure to rallies in the large-cap companies.
If large-cap and moderate-risk multicap funds make up more than 55-60% of your long-term portfolio and you do not have a surplus to invest, you could consider booking profit in some of these and redeploy them into mid-cap and small-cap funds based on your risk appetite.
If you wish to remain out of the pure mid-cap/ small-cap segment owing to your low risk appetite but still wish to maximise opportunities, look for large-and-mid or multicap funds that follow a value-based strategy. These may see better participation in a rally than growth-based funds. Similarly, multi-cap funds that follow a focused, bottom-up strategy with higher mid/small-cap allocations may be a good diversification, if your portfolio already holds a high share of large-cap index funds and/or large-cap funds.
Funds to choose
Consider any of the funds listed below, based on what you may already hold. The funds are drawn both from Prime Funds and outside it. We have looked for portfolio and strategy to make our choices more than past performance. We have moved beyond the Prime Funds list to spot funds that haven’t performed well in the past, but whose portfolios and strategy may hold them in good stead – this could also amount to buying on lows.
| Fund name | Category | Rationale |
|---|---|---|
| Invesco India Contra (Prime Funds – moderate risk) | Equity - Contra | Follows a core value-based strategy while keeping a small portion in earlier value picks that have run up. Takes up to 30% exposure to mid-cap stocks, and is an option for the more risk-averse |
| Motilal Oswal Nifty 500 (Prime Funds – index) | Equity - Index | Broad-market index that can capture opportunities across the market cap curve and may be difficult for multicap funds to beat. An option for both the risk-averse and high-risk. |
| Kotak Emerging Equity (Prime Funds – high risk) | Equity - mid-cap | Aggressive mid-cap fund that looks at the smaller stocks within the mid-cap range. Consistent outperformer. |
| IDFC Sterling Value | Equity - Value | Value fund holding 80%-plus of its portfolio in mid-cap and small-cap stocks. Captures upsides very well, but falters both on downside containment and volatility |
| DSP Smallcap | Equity - Small-cap | A once-stellar fund that got thoroughly beaten up in the small-cap correction. Showing signs of a recovery, and holds stocks across multiple cyclical and other beaten-down sectors. |
Kindly note the following:
- All of these funds require a long-term holding period – they are not picks for the year 2020 alone. We have tried to identify entry points for these based on our outlook for the current year.
- Our point is that 2020 is a good time to accumulate equity with a long-term perspective, as growth appears to be bottoming out, broad-market valuations are attractive post correction, and markets can rally on anticipation of growth. We have identified which pockets of equity can perform better.
- The funds we have picked outside our Prime list carry higher risk. We are conscious of the lower rating (which is based on past performance) of such funds. Prime Funds, on the other hand, are far more consistent by nature. You may therefore decide to stick to the more consistent performers from our Prime list or take a conscious risk-return call, if our choices appeal to you.
- Make sure that in your overall equity allocation, mid and small caps do not account for over 30%.