While every investor is chasing high-yielding funds, there are also those chasing underperforming mutual funds to take advantage of current attractive valuations. Wealth advisors have repeatedly advised that historical returns are no guarantee of a plan’s future returns. So just because a scheme has performed well in the past does not mean it will perform well in the future.
Alternatively, one can invest in underperforming schemes to take advantage of market corrections.
So, when the valuation of a scheme (due to market correction) becomes attractive, one may consider investing in it and book profits at a later stage. It may not be a very tempting thing to do, but some wealth advisors still recommend that investors choose it.
Sridharan Sundaram, founder of Wealth Ladder Direct, said investors can invest in infrastructure and information technology (IT) funds as they are now attractively priced. “However, investors should be careful not to hold excessive exposure to sector funds,” he added.
Shweta Rajani, Head of Mutual Funds at Anand Rathi Wealth, says, “When investing in mutual funds, it is important to look beyond historical performance. Funds should not be selected based on the recent high or low returns. Instead, it is often difficult for investors to gauge the underlying investments of these funds on their own growth potential, so it becomes important to choose a diversified portfolio.
“Industrial funds and thematic funds are not an option for every investor as they go through performance cycles and require tactical entry and exit. This can pose risks for ordinary investors. If investors make the mistake of Going into a fund cycle like this, their returns could be severely impacted,” she said.
Reasonable price
Some experts believe stocks and funds are priced fairly. As of now, stock market valuations are reasonable and no major bubbles have emerged. “Earnings per share growth is expected to be around 11% for large-cap stocks and around 20% for mid-cap and small-cap stocks over one year. Therefore, simply diversifying across categories and market caps should be the first choice for investors.
Preeti Zende, a Sebi-registered investment adviser and founder of Apna Dhan Financial Services, echoed similar sentiments. “After four years of a bull market, the market is currently undergoing a correction. Many stocks are now reasonably valued, prompting investors to consider mutual funds as a way to diversify risk. Industries that previously had excellent returns, such as power, defense, railways, Automobiles and even fast moving consumer goods are facing major challenges in this adjustment.
“I have always emphasized investing in diversified stock mutual funds rather than investing in funds in specific industries, because industry funds tend to be cyclical and have higher risks. Although these industries currently have lower net asset values, blind investment is not advisable.” If you have extra capital and a long-term view, sectors like IT, banking, pharmaceuticals, automobiles and FMCG seem promising, but treat them as satellite portfolios.
