Market dip: What should investors do with their mutual fund holdings?

Despite the recent corrections, valuations, especially in the mid-cap and small-cap segments remain elevated.

Indian equity markets have seen sharp corrections due to continuous FII outflow, rising US Yields and weak earnings growth. One of the key shifts globally has been the rise in US interest rates, influenced by factors such as rising fiscal deficit, persistent inflation,  and uncertainty surrounding US president Donald Trump’s policies.  This is of significance because yields are persisting at levels last seen during 2007-08 period and markets expect yields to remain higher for longer. Japan, another major economy and an important carry trade participant, seems to be also on the path for higher rates after a period of ultra-loose monetary policy for more than 15 years.

 

 

According to a report by brokerage Motilal Oswal, individual stock level correction is much more severe than indices suggest as average price fall in stocks from the all-time high is almost twice the index fall. 

 

"75% stocks from Mid Cap 150 & Small Cap 250 Index are down by more than 20% from all-time high. However, despite corrections, Mid Cap and Small Cap valuations continue to remain expensive, while Large Caps look more reasonable trading below the 10 year average forward PE multiple.

 

We expect the markets to remain in the such corrective to consolidation phase for the next 3 to 4 months and such phases of the market should be considered for gradual accumulation," it said in a note. 

 

Equity Allocation & Deployment Grid 

Motilal Oswal has advised investors to  increase allocation by implementing a lump sum investment strategy for Hybrid & Large Cap Equity Oriented fund and staggered approach over the next 6 months for Flexi, Mid and Small Cap Strategies.

 

"With the evolving interest rate scenario, long-term yields are expected to remain higher for longer and hence, we recommend exiting Duration Strategies for fixed income investments and being Overweight on Accrual Strategies in the fixed-income portfolio," it added. 

Fixed Income View & Portfolio Strategy:

With the evolving interest rate scenario, we believe the duration play is in its last leg and long term yields to remain higher for longer and hence duration can be exited fully. Actions by RBI on rate cuts and liquidity, are likely to result into steepening in yield curve. Motilal Oswal recommend fixed income portfolio to be Overweight on Accrual Strategies. 

• Accrual can be played across the credit spectrum by allocating 45% – 55% of the portfolio to Performing Credit &

Private Credit Strategies, InvITs & Select NCDs

 

• 25% - 35% of the portfolio may be invested in Arbitrage Funds (minimum 3 months holding period), Floating Rate

Funds (9 – 12 months holding period), Absolute Return Long/Short strategies (minimum 12 -15 months holding

period)

• For tax efficient fixed income alternative solutions, 20% - 25% of the portfolio may be allocated in Conservative

Equity Savings funds (minimum 3 years holding period)