How to position equity mutual funds in current times?

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Market dynamics are drastically changing domestically as well as globally and have raised concerns over the investing approach to have in these times. In this regard, George Heber Joseph, CEO & CIO, ITI Mutual Fund shares with us his market outlook and talks about how to position equity mutual funds.  

Changing dynamics and outlook

As IIP (Index of Industrial Production) numbers reveal, capital goods have been a major disappointment. The investment cycle has not yet taken off­ and will be deferred again due to the geopolitical tension and uncertainty. War in Eastern Europe and lockdowns in China have intensified global supply chain issues and related domestic sectors will continue to reel from this dual shock.

Inflation in India is largely driven by global factors. Post covid supply chain bottlenecks and sudden shifts in demand from services to manufactured goods have been the key drivers for inflation. The country’s GDP projection is seeing a downward revision owing to accelerated inflation and the continued Russia-Ukraine conflict.

RBI and the central government have taken important policy measures to combat inflation.  

RBI increased the repo rate and Cash Reserve Ratio (CRR) by 50 basis points (bps) in May 2022 and the Central Government reduced excise duty on petrol and diesel, imposed export duties on steel and banned wheat exports. RBI further increased the repo rate by 50 bps this month and removed the accommodative stance in monetary policy.

Indian markets will continue to witness increased volatility given (1) Aggressive rate increases and quantitative tightening by global central banks, (2) Rise in domestic interest rates, particularly bank fixed deposit rates, after a long period of low interest rates, (3) Uncertainties around the resolution of the geopolitical situation and (4) Continued selling by Foreign Institutional Investors (FIIs) in emerging markets including India.

Views on sectors  

India’s earnings growth trajectory should see a moderation in the next two quarters. When the global macro situation stabilises, we feel the domestic cyclical sector should see a strong rebound. Thus, domestic cyclicals such as auto and auto ancillaries, consumer durables, real estate and building materials, capital goods and engineering, and infrastructure-related sectors should do well.

Within defensives, pharma and healthcare sector should do better as it comes out of a low growth phase and the valuation is extremely attractive.

The right approach to investing

The macro outlook is likely to remain challenging over the next few quarters. While markets have seen some correction in the last few months, valuations have not yet entered the attractive territory. Also, there is a wide divergence in valuations of different sectors.

Investment in equity funds, particularly mid and small cap categories, should be done systematically over the next twelve months in the form of daily/weekly Systematic Transfer Plans (STPs) or Systematic Investment Plans (SIPs).

Investors wanting to invest in lump sum can opt for ITI Balanced Advantage Fund. More conservative investors can consider ITI Conservative Hybrid Fund for returns better than traditional savings products at comparatively lower volatility.

Disclaimer: Mutual Fund investments are subject to market risks, read all scheme related documents carefully.

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