MF Talk: Himanshu Srivastava of Morningstar has some advice for investors investing in small & midcap funds
MF Talk: Himanshu Srivastava of Morningstar has some advice for investors investing in small & midcap funds
“Investors diving into mid and small-cap funds without considering their risk tolerance may be up for a huge surprise when market trend reverses and these segments underperform,” says Himanshu Srivastava, Associate Director - Manager Research, Morningstar Investment Research India.
In an interview with ETMarkets, Srivastava said: “Mutual funds are designed for long-term investment, and short-term trends like election volatility will not significantly impact an investor's overall portfolio in the long run,” Edited excerpts:
Equity flows almost doubled in May 2024. What could have led to the rise in the flows?
Equity oriented funds witnessed a robust net inflow of INR 34,697 crores in May, which was sharply higher than the net inflow of INR 18,917 crores in April.
Intermittent corrections provided investors some buying opportunity in a market, which has largely witnessed a prolonged uptrend for a long time now.
Additionally, the anticipation of the NDA government returning to power fueled investor optimism, as many expected the markets to rally further if the NDA was re-elected.
Consequently, it seems that investors aimed to capitalize on market volatility ahead of the election results. The fear of missing out may have also driven their investment decisions.
SIPs also topped nearly Rs 21,000 cr. Can some of it be attributed to top up or additional SIPs done to factor in election day volatility?
Election time volatility is typically short-lived and should not be a factor to consider in making long-term investment decisions such as starting a SIP.
However, some investors may have increased their SIP amounts or initiated additional SIPs to take advantage of election-related volatility or in anticipation of a market rally if the election results align with expectations.
Generally, investment decisions based on such speculative factors should be avoided.
Mutual funds are designed for long-term investment, and short-term trends like election volatility will not significantly impact an investor's overall portfolio in the long run.
Despite volatility in broader market space – small & midcap funds attracted 2700 cr but not so much in the large cap space which most experts are advising now. What are your views?
Over the past three years, mid and small-cap indexes have significantly outperformed their large-cap counterparts. This superior performance has drawn considerable investor interest, particularly in mid and small-cap funds.
For instance, over the past year alone, the mid-cap category saw a net inflow of INR 26,625 crores, while the small-cap category experienced an even higher net inflow of INR 45,121 crores.
Additionally, the number of folios increased by 38% in the mid-cap category and by a massive 78% in the small-cap category.
These trends indicate that investors are largely chasing the strong performance of mid and small-cap funds, favouring them over large-cap funds.
Unfortunately, in times of market exuberance, risk appetite—a crucial factor when investing in mid and small-cap funds—often gets overlooked.
Investors diving into mid and small-cap funds without considering their risk tolerance may be up for a huge surprise when market trend reverses and these segments underperform.
Therefore, it's essential for investors to understand the risks associated with mid and small-cap segments before making investment decisions.
Even the fixed-income space fell more than 70%, but strong inflows were seen in liquid funds. What is the trend that you are seeing in the fixed income space given the fact that equity markets are trading near record highs? Do you see some churn?
Except for overnight and liquid fund categories, which primarily receive inflows from corporates and institutions, most other debt-oriented categories have experienced subdued inflows for some time.
Changes in tax implications on debt funds had an impact on the flows into this segment. Additionally, the equity market rally has led investors to shift their focus towards equities in search of higher returns.
Anticipation of future interest rate movements has also been a major driver for flows into debt categories.
Due to the uncertainty surrounding the interest rate cycle, most inflows are directed towards categories with a duration profile of less than a year, such as ultra-short, money market, and low duration funds, which are less exposed to interest rate risk.
The higher flows in liquid funds could be attributed to corporates parking their excess money in these funds for the short term.
In terms of NFOs there were many index funds as well as thematic funds were launched. What is fueling the trend?
When markets are rallying and positive sentiment abounds, it's common to see a surge in NFOs aimed at capitalizing on the trend. The launch of various funds, whether index, thematic, or sector-specific, is not surprising and has precedent in the industry.
SEBI’s "one category, one fund per fund house" rule restricts fund houses from launching new funds in categories where they already have offerings.
However, they can still introduce sector-specific or thematic funds due to their distinct investment mandates. On the passive investment side, fund houses can launch multiple index funds or ETFs as long as they track different indexes.
These areas provide fund houses with some flexibility to introduce new funds with differentiated investment strategies.
In recent years, passive investing has gained significant traction and acceptance among investors, leading to a proliferation of NFOs in this segment.
Consequently, the industry now offers a variety of passive strategies with different investment mandates and risk-reward profiles. It's crucial for investors to recognize that not all passive funds are alike and will not yield similar outcomes.
As with any investment, due diligence is necessary when selecting index funds or ETFs to ensure they align with one's investment objectives and fit well within their portfolio.
The recent market rally has seen impressive performance in several sectors, prompting fund houses to launch numerous sector-specific or thematic funds.
However, these funds carry their own set of risks that investors need to thoroughly understand before committing their investments.
Retail investors are now becoming more aware of when to put the money and this is evident from the fact that most investors wanted to buy the dip post election results. What are your views when you interact with the clients?
This is a positive trend which has emerged over the last few years. Unlike in the past, when there used to be exodus of money from funds when markets turned adverse, now on the contrary, we see money flowing into the funds whenever the markets correct. These are the signs of mature investors.
Nevertheless, mutual funds are designed for long-term investment. While investing during market corrections can be beneficial, trying to time the market should not be the strategy. The best way to handle market volatility is to invest consistently, preferably through the SIP route.
Investments should be made thoughtfully and in the right funds that align with investors’ goals. Making investments based solely on market movements without careful consideration can be counterproductive in the long run. Such an approach is not suitable for mutual fund investing.
What would you advise investors for the month of June?
Advice on equity mutual funds cannot be based on a one-month or one-year timeframe. Equities and equity-oriented mutual funds are long-term investment avenues, and investors must be prepared to stay invested for an extended period to maximize benefits.
Anyone with an investment horizon of less than five years must consider avoiding equity funds.
Adhering to the fundamentals of investing and avoiding market timing is crucial. Investments should align with one's financial goals and risk tolerance to generate long-term wealth.
It's important to keep things simple and avoid trendy or complex products that may not add any significant value to their portfolio. Once invested, regularly reviewing the portfolio is equally important to ensure it remains on track.
(Disclaimer: Recommendations, suggestions, views, and opinions given by experts are their own. These do not represent the views of the Economic Times)
For more news like this visit The Economic Times.