With capital markets exponentially scaling record highs recently, retail investors have opportunities and dilemmas regarding deploying funds at current valuations. Carefully selected mutual fund instruments like Equity Linked Savings Schemes with tax arbitrage benefits. Hybrid schemes blending equity and fixed income or broad-based Index funds closely mirroring benchmarks can lend stability.
These categories carry individual merits across risk parameters, returns potential, costs and tax efficiency that adapt to both bull run upside capture and downside protection needs of investors at a time when analysts perceive markets as over-heated. Evaluating them in present contexts can empower prudent decisions.
Types of Funds to Consider
1. Equity Linked Savings Scheme (ELSS)
Equity Linked Savings Schemes (ELSS) refer to diversified equity mutual funds that offer tax savings benefits under Section 80C up to ₹1.5 lakhs yearly. As mandated, a minimum corpus allocation towards equities benefits investors from long-term capital appreciation in stock markets. The lock-in period of 3 years in ELSS stands lower than common tax savings avenues like PPF, NSC, etc., making them more liquid. Combining tax rebates with potential market-linked growth over horizons of 5 years or more makes ELSS a preferred tax planning tool for several investors. Careful selection of ELSS based on past return consistency, expense ratios, and portfolio concentration aids informed investment decisions.
2. Hybrid Mutual Funds
Based on an investor’s risk appetite and market conditions, hybrid mutual funds invest across equity and fixed-income assets within a single portfolio. The equity component fuels growth, while debt provides stability and lower volatility. Conservative hybrid schemes allocate predominantly in fixed income, while balanced and aggressive funds take higher stock exposure. Based on prevailing market outlooks and risk tolerance, aligning the hybrid asset mix periodically via rebalancing enables wealth creation and risk adjustment. Opting for funds with proven track records on maintaining target asset allocation and delivering returns aligned to category objectives aids identification.
3. Index Mutual Funds
Index funds are passively managed mutual funds that closely replicate the composition and weightings of benchmark indices like Nifty or Sensex. The goal is to generate equivalent returns as that of the underlying index at minimal costs instead of attempting to outperform. As index funds directly provide diversified exposure to the index basket of securities, they carry relatively lower expense ratios and risks than actively traded funds. Tracking error is vital when selecting index funds indicating deviation from benchmark returns. They also lend ease of aligning investments to prevailing market views based on underlying index dynamics.
Investment Strategies for a Red-Hot Market
- Evaluate Asset Allocation Mix: Rather than drastically change the investing approach, review how much is allocated to equities via ELSS/hybrids versus stable debt. Beyond a threshold, trim further equity exposure if uncomfortable with rich valuations. Let some locked ELSS funds attain maturity to realise profits while continuing SIPs. Debt funds provide ballast to anchor the overall portfolio now.
- Prefer Staggered Entry: For fresh investments, favour a staggered approach through monthly SIPs over the next 3-6 months. Benefit from any interim market dips via rupee-cost averaging. The moderated deployment also reduces the risks of entire capital entering at the peak if sentiment reverses swiftly. Continue existing SIPs without disruption too.
- Maintain Long View: Create predefined redemption schedules aligned to life goals like education, retirement, etc. Avoid jeopardising these for short-term temptations. Similarly, set predefined levels for profit booking yearly to balance out new entrants. This enforces a more extended investment outlook overriding temporary greed.
- Rebalance Holdings: Review mutual fund holdings to check for deviations from the original intended asset allocation, including crowded trades like high similar stock overlaps between schemes. Rebalancing helps realign as per strategic benchmarks, booking profits where equities have grown disproportionately high and moving amounts to debt for stability.
- Prefer Index Funds Selectively: Opt for index funds replicating benchmarks with stock representations mirroring current positive economic and consumption realities. Financial services, retail, and auto indices capture frontline outperforming sectors now. However, be selective as all stocks won’t sustain business dynamics uniformly during eventual cooldowns.
- Temper Return Expectations: Recalibrate return expectations, aligning them closer to historical market averages rather than extrapolating near-term bull run momentum. Build safety buffers into financial plans accounting for 10-15% lower potential gains over the next 2-3 years, given rich valuations limiting massive upsides.
- Focus on Consistent Winners: Review portfolio for consistent long-term compounders rather than tactical bets riding temporary hype cycles. Eliminate speculative positions in unviable business or sectors facing structural declines. Adhere to diligence filtering only fundamentally sound and ethical opportunities capable of crossing market cycles.
The Bottom Line
Navigating a red-hot market requires a balanced, strategic approach to investing. Whether it’s leveraging ELSS’s tax benefits and growth potential, finding the right mix in hybrid funds, or tapping into the broad market exposure of index funds, careful selection and regular portfolio rebalancing are key. Remember, aligning investments with your long-term goals and risk tolerance, not chasing short-term gains. Stay informed, stay prudent, and keep your financial objectives in clear focus.
