Stick to defensives: Investors should hunt for large-cap funds, say experts

It has been a harsh month for stock market investors. With the S&P BSE Sensex shedding over 4,000 points or 11 per cent since hitting the all-time high of 38,896 points in August, and the rupee hitting 74/$, investors would be worried if they were staring at a 2008-like situation.
 
Deven Choksey, MD, K R Choksey, says: “After the mid-cap carnage last fortnight, now the fall has started in large-cap stocks. Foreign institutional investors are selling, and they sell what’s saleable in the market. Their exit is driven by the threat of rupee depreciating further. They are estimating Rs 74-76/$. And to protect their portfolios from currency loss (mark-to-market), they are taking out funds from Indian markets, along with other markets. Unfortunately, it started with currency fall and has now extended to stocks.”
 
The worst part about such corrections is that fundamentals of the blue-chip companies, where the fall has started, really don’t matter. Even good companies can take a severe knock because of the overall sentiment.
 
No quick end to pain: Rising oil prices have created worries about higher inflation and widening of the fiscal deficit. “The high price of oil is a big concern for the economy and markets. The steep fall in the exchange rate has also emerged as a major concern,” says G Chokkalingam, founder, Equinomics Research & Advisory.
 
Lack of liquidity in the hands of investors is also contributing to the current meltdown, according to Chokkalingam. Wealth erosion started with companies suffering from governance issues and balance sheet crisis. It then spread to non-performing assets-laden public sector banks, over-valued private lenders, and then to the leading indices.
 
On Friday, the markets were also expecting the Reserve Bank of India (RBI) to intervene to check the fall of the rupee by raising the benchmark rate, which it did not in its fourth bi-monthly monetary policy review of 2018-19. Many expect that the rupee may weaken further.
 

Direct equity investors need to play safe: “Move into large-caps which are a relatively safer bet at present. Many sector leaders are available at attractive valuations, and investors will be able to make money in them over the long term,” says Naveen Kulkarni, head of research, Reliance Securities. Mutual funds investors, who are allocated heavily to mid- and small-cap funds, too, need to shift their allocation towards large-cap funds. Diversifying into debt funds and international funds will also reduce volatility in portfolios.   
 
Stick to defensives: As there cannot be an early resolution to the issues affecting market sentiments, experts suggest that investors should hunt for quality large-cap stocks that didn’t participate in the rally. “Our preference remains with large-caps, given the premium of midcaps to large-caps in an environment of challenging macros, the potential slowdown in domestic equity flows, and a forthcoming busy political calendar,” states a report from Motilal Oswal.
 
The rupee’s fall has a positive impact on the earnings of export-oriented sectors. “We have 25 per cent weight towards information technology (IT) companies in our model portfolio,” says Kulkarni.
 
Defensive sectors tend to do well in uncertain times. Investors can, therefore, look at large pharma companies. Most fast moving consumer goods stocks are expensive, but some large companies are trading at a discount to market leaders. They could deliver better returns over the next two-three years.
 

Modify category allocation: Mutual fund investors, especially those who came in during the recent bull run, need to remember that such downturns are part and parcel of equity investing. “The goals for which investors started equity investing would typically be five, seven or 10 years away. They should not worry about short-term volatility and should stay invested for the long-term,” says Radhika Gupta, chief executive officer, Edelweiss Mutual Fund. Do not stop your systematic investment plans (SIPs) in equity funds.  
 
Investors should also consult their financial advisors to see if they are in products that are suited to their risk profile. “It is only when you go through a correction and see losses in your portfolio that you get a sense of your true risk appetite,” says Gupta. Inexperienced investors tend to chase the highest-yielding asset class, which in 2017 consisted of micro-cap, small-cap and mid-cap funds. “If an investor has ongoing SIPs that are focused largely on mid- and small-cap funds, he should rebalance and increase allocation to large-cap funds,” says Nikhil Banerjee, co-founder, Mintwalk. At least 60-70 per cent of the equity portfolio should be in large-cap funds. And this change in allocation should be accomplished by investing more in large-cap funds rather than selling mid- and small-cap funds.
 
Diversify into debt funds: Experts say that first-time investors, who were earlier investing in fixed deposits should opt for hybrid funds, like equity savings funds, aggressive hybrid (balanced) funds or balanced advantage funds. Currently, if they have exposure only to equity funds, they could diversify into debt funds to make their portfolios more stable. “Since interest rates are unlikely to soften in the near-term, invest in liquid funds and ultra-short term debt funds. Anything having an average maturity of more than one year will be exposed to duration risk,” says Banerjee. He adds that investors funds that take high credit risk to earn extra returns should also be avoided.