Invest in Credit Risk Mutual Fund or not?

Investors try to invest in a way that they can achieve maximum return with minimal risk in a given tenure.

The investment options ones chooses depend on risk appetite, investment horizon, financial goals, investment objective and liquidity needs.

Historically, retail investors in India were exposed to very limited options like gold, real estate, equities, mutual funds and fixed income products like bank FDs, Public Provident Fund (PPF) and bank RDs.

With the passage of time, thanks to financial engineering, investors now have a wide range of investment options like exchange traded funds (ETFs), real estate-investment trusts (REITs), and sovereign gold bonds.

Given low financial literacy levels, a large section of the public switches between fixed income products and equities, depending on the euphoria in the markets.

Now that stock markets are at all-time highs and FD & RD rates are low, it is advisable for investors to focus on equities. Because of declining returns, fixed income assets have become unprofitable and unattractive for risk-averse investors and retired employees – who rely on such products to get a steady income.

In an environment of high inflation, such low returns on capital tend to undermine capital and thus, the aces dwindle.

Although volatility is consistent and unavoidable in equities, in this scenario equities can be considered as investment option provided investors tread carefully.

Indian indices are up about 95% since their March lows, due to excess global liquidity and low-interest rates. With central banks not in a hurry to pull back the liquidity in the near future, the party in equities will continue. Given these factors, the year 2021 is going to be the year of equities.

Within equities, while large caps have led the rally so far. But there are many sectors that are yet to participate in the rally like cyclicals. These sectors are those that are worst affected by social distancing norms including tourism, travel & hospitality and outdoor entertainment stocks.

Within cyclicals, while metals stocks have already started moving up, other sectors like roads, infra, EPC players and real estate should start rallying now as it is widely expected that the government would focus heavily on infra sector in the upcoming budget.

Some other themes investors can focus on include turnaround stocks, cash rich public sector enterprises (in anticipation of divestment/buybacks and high dividend payouts) and companies that enjoy near-monopoly in their industries.

Investors should build a judicious mix of large caps, cyclicals, turnaround stocks and beaten-down well managed small and mid caps with solid fundamentals.

Within large caps, while many are trading at their 52-week highs, investors should enter on dips perhaps on big down days. One could allot around 40% of their portfolio towards large caps, with balance equally allotted between cyclical, turnarounds and quality small and mid caps.

(The writer is a market expert. Views expressed are personal)