In recent times when the markets have been moving higher, most financial advisors seem to be talking about this being the right time to invest in the equities either directly or through mutual funds. However, retail investors are not paying heed. And for good reason.
It is invariably seen that retail investors miss out on a rally because they wait on the sidelines for the 'right' opportunity. There’s always the fear that things might fall apart soon.
However, it is difficult to understand why many investors refrain from entering the equity markets via the mutual fund route where professional fund managers manage the portfolios armed with considerable technical and fundamental research. When markets rally and investors are at a crossroads on whether to enter the market or wait for the opportunity, it is advisable to start investing small amounts in equity mutual funds, so that they do not miss out on the rally completely.
If we look at the all-time peak prices of the indices across categories, it can be seen that large cap indices have recovered and are near or at their peak prices while the mid cap and small cap indices still have a long way to go to hit their peak prices.
Some may feel the indices are at their peak prices again and expect the markets to correct but it is because they get to see mostly Sensex and Nifty figures. Other common indices which are also the benchmarks for many equity mutual funds based on the category they belong are off their peak levels (See Muted Market).
A lot of investors stay away because once bitten they are twice shy. Is it wrong to be cautious? Certainly not, but excess of anything is not good. Nobody, even the best minds watching the market cannot predict with certainty their direction except for highlighting the positive cues and attributing it to predict future course. It has to be understood that there will always be people who will make money and some who will lose money. If the entire environment around the market is positive and there are only buyers, their orders will not get executed; it is only possible if there are equal numbers of sellers. So, at any point of time, whether the markets are going up or down, there will be people who are buying and there will be people who are selling. The challenge for investors is to be on the right side.
Mutual fund investment is comparatively safe as the investment amount is diversified across the basket of stocks, which provides it a little stability. For all the first time investors trying to get the feel of the market, Mutual Funds can be a good beginning. Does mutual fund performance during the recent spurt in the market show that the fund managers are prepared to deliver good returns and outperform the benchmarks?
If you look at the period between 1 October and 1 November this year, 50% of the large cap schemes outperformed the CNX Nifty which is considered the benchmark for large cap funds, however, the schemes may have different indices as a benchmark but for comparative purpose the CNX Nifty is considered here (See Fund Performance).
Most of the mid cap schemes outperformed the benchmark (30) compared to only 7 schemes underperforming the CNX Mid Cap index performance.
In multi cap schemes, without any bias to a particular market cap, underperformers were more than the outperformers when compared to the BSE 200 Index as the benchmark.
Coming to the small cap schemes when compared to the BSE Small Cap index all the schemes have outperformed the index.
So far so good.  But when it is a rally, the funds have performed decently and have outperformed the considered indices. The idea of managing schemes should be to perform in the up market conditions while trying to shield from the downside situations that may arise from time to time.
For this, we will try and gauge the performance from the higher levels of 1 November, 2013 till 13th November, 2013 where markets as a result of global conditions and probable profit booking came down by almost 5%. Let us look at the performance of the schemes here (See Fund Performance)
Here almost all the funds across categories have performed well against the considered benchmarks.
This shows that most fund managers were anticipating the upward move but were cautious enough to safeguard from the volatilities in the market.
Going forward, fund managers when convinced on the direction of the markets may take calls to outperform the index consistently.
Investors need to decide for themselves the amount of exposure they are willing to make on mutual funds depending on their risk appetite. The recent, small rally around Diwali had seen markets nearing the all time highs. The rally saw large cap indices making the most compared to mid and small cap indices and when markets came down, they were the ones which came down sharply as well.
This probably shows the investors in the market are entering with a fair bit of caution and major exposures are being taken in the proven market leaders (large caps) and profits are being booked as and when available.