by January 9, 2018 0 comments

The year 2017 was a remarkable one of the Indian mutual fund industry. Not only did the markets stage a stellar rally, for a change the retail investors participated in it too. The asset under management (AUM) of the industry crossed over Rs 20 lakh crore mark in a breeze, which was a long shot just 18 months back.

This was at a time when the transient effects of demonetisation and Goods and Services Tax (GST) implementation could have derailed the rally. That’s where the domestic investors stepped in eclipsing the foreign investors in terms of investments made, and thereby aiding the market to continue its northward journey.

And if the journey was any interesting, what made the ride epic was the rise of the Balanced Fund scheme emerging as the preferred choice of investment, among all the mutual fund products available, thanks to the in- creasing acceptance of volatility suite of products. However, going forward, given that the market has rallied, it is time to reconsider the investment decisions for 2018.

Given that the Indian markets have been buoyant, many investors who have been on the sidelines finally made an entry into the mutual fund space by investing in equity or balanced schemes. The same is true for those investors who have been waiting for a ‘market correction’. Going forward as more and more investors start entering the market, especially the first time equity investors, it’s important to get the investment and the expectations set right.

With the Indian equity markets in a mid-cycle path, the things to watch out for would be how the 4Cs — capacity utilisation, corporate profitability, capacity expansion and credit growth pan out.

Currently, each of these parameters is at multi-year low. Capacity utilisation is close to 70 per cent, which is far from the 92 per cent achieved during the 2007 rally. The same is true even on the corporate profitability front which has been almost lat for the last four years.

It is only when these two factors gather steam; capacity expansion and credit growth can kick in. Currently, it is based on this expectation that the markets have rallied. Going forward, the rising earnings momentum shall keep markets buoyant but with volatility.

This is where balanced advantage category of schemes comes to the fore. Here the investments made are invested across equity and debt asset classes, depending on the relative attractiveness of an asset class.

In the current market condition, such an investment would mean reducing positions in the best-performing asset class (equity), while adding to positions in another asset class (debt). The auto rebalancing ensures that emotions are placed aside thereby following a ‘Buy Low and Sell High’ strategy.

By investing in such products what an investor essentially attains is equity participation at a reduced risk profile. Since the Indian equity markets have rallied sharply over the last two years, with the valuations being stretched at some pockets, it is very likely that market are likely to be volatile. At such instances, the presence of debt will add a cushioning effect to the investments made.

(Nimesh Shah: The writer is MD & CEO of ICICI Prudential AMC)

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