Equities have fallen, but mutual fund houses’ models indicate we aren’t out of the woods yet

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On Monday, the benchmark Nifty50 index fell by 427 points, or 2.64 percent, over Friday’s close. That marks a fall of 9.1 percent so far this year. The Nifty 500 index, which represents the broader market, is down 10.53 percent this year, indicating that as always the mid-and small-cap stocks are hit harder. Among sectoral indices, the Nifty IT and Nifty Realty indices have fared the worst with losses of 27.87 percent and 19.89 percent, respectively. Though investors are continuing with their systematic investment plans, many have been waiting on the sidelines to put in lump-sum amounts to take advantage of the crash.

But are equity markets attractive enough just yet? Many distributors and financial advisors rely on sophisticated tools used by fund managers to assess how far the markets can fall from here on. And if equity markets are undervalued already.

Are the valuations attractive?

According to The Navigator, a quarterly report released by DSP Mutual Fund, valuations are no longer frothy. “Only 20 percent of NSE 500 stocks are above their 200-day moving average, as compared with a long-term average of 50 percent. Markets have usually turned upwards at such low levels,” the report says.

ICICI Prudential Mutual Fund in its monthly outlook points out that its equity valuation index (EVI) is quoting around 114.7, which is in the neutral band of valuations. It indicates that valuations have come down but are not cheap enough yet to aggressively invest in equities.

Motilal Oswal Asset Management Company uses the 30-day moving average value in its in-house valuation tool, the Motilal Oswal Valuation Index (MOVI), to decide if equities are attractive. It is currently hovering around 107, which indicates that the stocks are in the neutral zone and investors should progressively allocate to equities taking advantage of the recent correction.

Expectation of a steep increase in interest rates in a short span by the US Federal Reserve, the war between Russia and Ukraine, and rising inflation worldwide have spooked the markets. The Reserve Bank of India too has noted the persistent inflation and decided to raise interest rates by 90 basis points so far. The effects of all these are seen in Indian stocks.

How much should you invest in equities?

Investing in equity mutual funds can be tricky if you have been doing so in the recent past. After enjoying double-digit returns, the one-year returns have drastically come down.

In CY2021, small-cap funds and flexi-cap funds gave on an average 65.37 percent and 33.64 percent returns, respectively, as per Value Research. However, in CY2022 these funds have lost 11.67 percent and 9.78 percent, respectively, despite a recent bounce in the stocks. The correction in the stock market may offer an opportunity to get into stocks. But trying to pick that perfect bottom point to enter in order to maximise your gains can be futile.

Chintan Haria, head, product and strategy, ICICI Prudential Asset Management Company, says, “Investors should stick with schemes that allow fund managers to move across sectors, market capitalisations and asset classes.”

According to an internal model that Arun Kumar, head of research, FundsIndia, follows, markets are “neither cheap nor very expensive”. He suggests an asset allocation method to investing—have a meaningful allocation across all asset classes, and not just equities. “We are at the early phase of the earning cycle and the sentiments are mixed, neither too euphoric nor pessimistic. The FIIs (foreign institutional investors) are selling and domestic money is supporting the market,” he adds.

While the markets can be rewarding in the long run, looking at various macroeconomic parameters to assess if they are attractive at a given point of time can be a tall ask for most retail investors.

Jitendra Solanki, a Securities and Exchange Board of India- registered investment advisor, says, “Instead of taking your investment decisions based on stock market movements, it is better to decide in the context of your financial goals. If your financial goals are at least seven years away, then you should start allocating to equities in a staggered manner.”

Take exposure to large-cap, mid-cap and small-cap equity funds taking into account your risk appetite. “Balanced advantage funds work for investors who cannot decide their asset allocation, but still want exposure to stocks,” he adds.

While the traders may be busy guessing the next big move in equities, long-term investors, however, should allocate money to well-managed equity funds at regular intervals.

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