The last few weeks have been eventful, and the Indian markets have undergone a correction of more than 10%. Nifty 50, after touching a high of 26400, fell to a level of 23400.
We believe the recent slowdown in Indian markets is a temporary phase influenced by external factors like FII selling, China stimulus, USA elections, and heavy rains in the July-Sep quarter. The Indian government spending also was much lower, bringing the fiscal deficit to 3.4%.
Importantly, India’s economic fundamentals remain stable and strong. The recent big win in Maharashtra for the coalition led by BJP will give a fillip to the resumption of government spending, and that will be a growth booster. The Trump effect has caused investments to flow to the USA market, and generally, a strong USD adversely affects emerging markets. However, there is a strong differentiation within the EM basket, and India is mostly a preferred destination. The market’s long-term uptrend is very much intact, and I remain optimistic about its performance moving forward.
Therefore, for medium-term goals (anything above 3 years), allocation to equities should remain on the higher side. Fresh money could be invested in tranches, utilizing the STP route – systematic transfer plan. Equity mutual fund schemes remain the preferred way to express interest in stocks because of the broad-based market and rapid rotation across sectors and caps. Consequently, selected schemes should belong to categories that allow easy movement from one cap to another, and a few examples are Large & Midcap, Multicap, Flexicap, and Focus. Also, fund managers who identify the right sectors quickly should be selected. One helpful pointer is the percentage of schemes, managed by them, which are in the top quartile during the last 2 years.
As always, with the global and local uncertainty, some part of the portfolio should always be invested in high-quality short-term debt funds to take care of liquidity and any contingencies. Similarly, for short-term goals, equities, because of their volatile nature, should not be deployed. Equity savings schemes, balanced advantage schemes, because of their hybrid nature, or multi-asset funds may be utilized for goals with a time horizon of 2-3 years. An additional advantage of these schemes over traditional bank deposits is the much lower equity taxation that these schemes enjoy. Portfolio construction should be sequential in the order of liquidity, safety, and yield-enhancing components.
