Is MF the best alternative for wealth creation in 2019?

Overall 2018 was a disappointing year for equity investors as the markets witnessed heightened volatility throughout the year and the broader markets saw a huge sell-off. In 2018, although the headline benchmark indices Nifty50 and S&P BSE Sensex managed to close the year with modest gains, but these gains were on the back of select stocks, broader markets saw significant correction, the S&P BSE MidCap Index had a negative return of 13.65%, while the S&P BSE SmallCap Index lost 23.69% for 2018.

Going forward, for 2019, some of the headwinds that the equity markets were grappled in 2018, have subsided to an extent. Global crude oil prices have come down to sustainable levels from the Indian perspective, the Indian Rupee is also off from its historical lows, headline inflation is well below the RBI target levels and there is already a cut of 25 bps in February 2019 RBI policy and chances of further interest rate cut in the year remains high. Midcap and small caps stocks have come down significantly from their unrealistic valuations and are currently trading at attractive multiples; taking all these factors into account, from a long-term perspective, the Indian equity markets are expected to do well.

Although, the equity markets look good from a long-term perspective, in the short term the markets are expected to be extremely volatile atleast in the run-up to the general election in May. The markets will have a clear trajectory based on the outcome of the elections, if the ruling dispensation comes back with a significantly depleted majority or if the opposition manages to throw a surprise, equity markets can see a huge sell-off. Keeping all these scenarios in mind; it is, therefore, advisable to focus on capital preservation and safety as an investment strategy in 2019. The prime focus this year should be to invest in moderately safe assets to preserve capital with moderate growths. Under volatile market conditions, one should have significant exposure to safe assets such as fixed income securities, fixed deposits or high-rated corporate debt instruments.

The most efficient way for investors to minimise portfolio risk in 2019 would be to invest methodologically at regular intervals through mutual fund systematic investment plans (SIPs). Investors should also focus on diversification to mitigate the volatility in a specific sector. As mentioned earlier, under uncertain market conditions one should have a significant exposure to fixed income securities for capital preservation, fixed income exposure can either be gained through debt mutual funds or through extremely safe banks FD’s or high-rated corporate debt instruments.

A perfect mutual fund portfolio is one that is commensurate with one’s risk appetite and is in all probability capable of meeting one’s financial goals. The first step towards creating a mutual fund portfolio is the identification of one’s risk tolerance; as it drives the decision-making process pertaining to asset allocation and the quantum of allocation in each asset class. Once one has accurately identified individual risk tolerance, the next step is to identify financial goals and ideally these goals should be clearly categorised into short-term, medium-term and long-term objectives. To generate wealth over the long term, it is essential to allocate some portion of investment to equities as equity is the only investment class that has the potential to give an inflation-beating return in the long term. Investing in stocks or equity mutual funds helps to beat inflation and build a corpus that will cater to one’s future needs, even if one is a conservative investor. One can directly invest in equities, but very few individuals have the skill set and the time to pick the right stocks. Hence, one can opt for the mutual fund route to invest in stocks.

An example of a possible asset allocation towards mutual funds that focus on safety is presented in the table..

To sum-up, retail investors who generally lack the specialised skill set to invest in direct equity or debt should make their investment through the mutual fund route. The investments should be made at regular intervals to smoothen out the impact of market volatility, and in this regard, mutual fund SIPs are best suited for retail investors. This year is expected to be a volatile one— in terms of returns, therefore, the focus should be on risk mitigation and capital preservation through debt instruments either directly or through mutual funds, some exposure to equity is necessary for an investment portfolio to maximise returns. This can be achieved by investing in large-cap and diversified equity-oriented mutual funds.

(The writer is Director, Wealth Discovery EZ/Wealth)