Investors who do not have time, skill and resources to research funds should invest in index funds and ETFs in any market environment.
Due to the drastic movements in the stock market sentiments caused by the Russia-Ukraine war, investors with substantial surplus amounts are getting lured in for one-time lump sum investments.
However, what is the correct way to invest in funds in the current market scenario? There is no one way of saying the right and wrong type of investment.
Anup Bansal, Chief Investment Officer, Scripbox says, “Investors who do not have time, skill and resources to research funds should invest in index funds and ETFs in any market environment. This is especially true to replace active large-cap funds as SEBI mandate requires these funds to invest a minimum of 80 per cent in the top 100 companies by market capitalization.”
So, the choices of stocks selection for the large-cap funds and opportunity to generate alpha are limited. He explains, “Past performance data suggests that very few large-cap funds outperformed the index (Nifty or Sensex).” As per the SPIVA India scorecard, the S&P BSE100 outperformed 82.72 per cent of funds in the large-cap category on a 5-year absolute return basis. The risk-adjusted return is higher in index funds and ETFs when compared to large-cap funds in more than 72 per cent cases on a 5-year basis.
“Investors who have time, skill and resources or are working with a financial advisor should consider a strategy that combines Index Funds and ETFs with active funds. Well-researched funds can generate material outperformance over the index, especially in mid-cap and small-cap categories,” explains Bansal. Sectoral index funds like banking, IT may be considered if investors have a view on that particular sector.
Overall, Bansal adds, “the portfolio strategy of an investor should be long-term and be driven by her personal situation and not the market environment. Short-term market movements should not be a trigger for change in the strategy or the invested products. Investors should adhere to their desired asset allocation with periodic rebalancing and monitor their investment portfolio regularly.”