The capital market witnessed a record-breaking in the calendar year 2021 as all frontline indices have delivered more than 30 percent returns, despite the threat from the coronavirus, high crude price, and change of monetary policy stance by central bankers all over the world.
The nifty -50 index is trading at a 12-month trailing price to earnings (PE ) ratio of 23.62, while the nifty mid-cap 150 and the nifty small cap 250 are trading at PE of 30.55 & 29.96 as of 1st Feb 2022. It shows that the market’s overall valuation is very high and Small-cap and Mid-cap are more valued than the large-caps. What should you do in this market? Where to invest your hard-earned money. Think twice before investing any money in equity and equity-related funds.
Equity and equity-related funds returns are always affected by micro and micro factors. Apart from that, political instability, drastic change of government policies, devaluation of currency, wide gap of demand and supply of goods and services have been affected the economic growth, which adversely impacts the market.
Strategy to invest in direct equity:
Tilting to small-cap, mid-cap stocks, and value stocks have generally delivered higher returns than large-cap funds in the market. Investment strategy tilt portfolio towards small-cap stocks is more risk as overweighing to the particular sector, always generating higher alpha than the market.
The investor should invest in the right quality of stock irrespective of sector, keeping in view that a multi-year growth upcycle is ahead in India. However, Corporate sector banks, IT, stocks such as cement, pipes, plyboards, etc., and Electric vehicles (EV), including battery-electric and plug-in hybrids companies, do well and are expected to deliver double-digit returns in FY 2022-23.
Strategy to invest in Mutual funds:
Active funds outperformed the benchmark index over the long period in the bullish market. However, the investor who invested in active funds is ready to take a small percentage risk if the fund underperformed the long-term benchmark. Generating an extra alpha is possible if the fund manager follows an investment style consistently irrespective of market conditions and portfolio turnover is less during the high volatility in the market. The investor should ensure the long-term rolling returns of the funds, and the fund Manager consistently follows the investment style.
The investor should know that the different investment styles: growth, value & growth at a reasonable price work differently. The novice investor needs to be vigilant while investing in active funds as the only performance of funds in the current period is not the best criteria because the change of fund’s investment style may underperform for a longer period than the market benchmark. Investors should evaluate the portfolio at least within six months, switch out the underperformed funds, and invest in other active or passive funds which performed well. For them, the direct plan of nifty 50 index funds or Sensex 30 index funds of top 5 mutual funds houses will be beneficial in all market conditions, as these index funds generate an average compound annual growth return of 8.5 to 9 percentage over the long term. Passive fund always generates market-equivalent returns.
Large-cap funds generate lower returns than mid-cap and small-cap funds. However, large-cap stocks belong to well-established business houses, give slow & steady growth over the long run, and their stock prices decline much slower than the small and mid-size companies during market downturns.
Capital market Outlook for 2022:
The stability of macroeconomic parameters should support consumption and investment and soften commodity prices coupled with demand recovery would support higher profitability in mid and small-cap companies. However, headwinds such as semiconductor shortage, a surge of coronavirus cases, and other supply chain disruption persist for the auto sector may affect the growth in 2022.
India Inc. can do well for the year 2022 compared to the emerging market; as a result, equity outperformance continues. The risk and rewards seem to be favorable for selected sectors such as real estate, domestic manufacturing, IT, Consumer discretionary, including the corporate banks.
To sum up, there will be high volatility in the equity market due to underlying economic factors, and investors should stay in the market through the SIP route and design a balanced portfolio based on their age and risk appetite, which mix of large, mid, and small-cap stocks and funds over a long period.
About the Author
R K Mohapatra is GM/Finance in IRCON & an “Eminent Author” awardee, has vast experience of 28 years in finance & Accounts, and is known for his work on financial planning and retirement planning for individuals.