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Sensex at all-time high. What first-time mutual fund investors should do

New Delhi: The BSE Sensex and Nifty hit record levels of 41,120.28 and 12,132.45 respectively on Tuesday (November 26, 2019). While this is good news for existing mutual fund (MF) investors as the value of their investment grows, new MF investors find it difficult to invest as the downside risk is high when indices hover around all-time highs.

Seasoned investors can handle the market downside more maturely as they have seen multiple economic cycles and have seen markets recovering from extreme pessimism. But new investors become panic when markets fall from all-time highs.

Experts say those who are beginning their equity investment journey at this juncture, should go for balanced advantage funds, which are less volatile compared to pure equity funds. These funds invest minimum 65% of their assets in equities while the remaining amount is invested in debt instruments to earn some fixed returns. As per Value Research, balanced advantage funds in the last one year have delivered between 12-15% return.

“First-time investors should adopt a cautious approach and stick to asset allocation funds,” a leading business daily quoted Amol Joshi, founder, Plan Rupee as saying. Joshi said these funds have low volatility and calibrate their equity exposure based on market valuations.

Joshi recommended ICICI Prudential Balanced Advantage Fund and Nippon India Balanced Advantage Fund. These funds, which invest in a mix of debt and equity investments, alter their equity allocations based on market valuations.

However, Joshi said aggressive investors with an investment horizon of 7-10 years can increase their midcap exposure to 40%.

“Valuations of mid- and smallcaps are attractive relative to largecaps, and the margin of safety is high. This set of companies reported a strong set of numbers for the second quarter and domestic flows here are strong,” the publication quoted Rajesh Cheruvu, chief investment officer, Validus Wealth. Rajesh recommended Axis Midcap and Kotak Emerging Equity funds, which have delivered 18.43% and 12.23% return in the last one year.

Worth mentioning here is that the valuation of Nifty Midcap 100 is still 30% lower than its peak valuation seen in December 2017. Analysts believe midcap companies are expected to report a strong set of earnings in the coming quarters. The publication citing a report by Principal Mutual Fund said the Nifty Midcap, which had traded at a premium to the Nifty, now trades at a discount. Its PE has corrected from 25.9 to 15.6, indicating there is value in midcap stocks.

Another report by Axis Securities points out that while institutional ownership of Indian equities is at its peak valued at $700 billion, small and midcap ownership within institutional portfolios has fallen by 600-700 bps to 14% from a peak of 20% in 2012.

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