The year 2021 was an incredible one for equity investors as the benchmark indices Sensex and Nifty touched new highs, a record number of demat accounts were opened and 63 firms raised Rs 1.19 lakh crore through initial public offers. While the benchmark BSE Sensex gained 21% in 2021, the BSE Mid-cap and BSE Small-cap reported gains of 38% and 61%, respectively, indicating a broad-based rally.
However, after touching a new high in October, the Sensex corrected more than 10% in the last two months of the year because of the Fed’s taper announcement, rising bond yields, higher commodity prices, and rising cases of the new Covid-19 variant—Omicron.
The year ahead
Analysts say India will continue to be an attractive destination for equity investment as the macroeconomic parameters remain stable. A market outlook note by Motilal Oswal Broking and Distribution, says Nifty is likely to deliver around 12-15% returns in 2022, supported by continuation of economic recovery and strong earnings growth. “After the recent correction, Nifty is now trading at 20x 12 month forward PE which is no longer in the expensive zone. While the market trend might be volatile in the near term on account of potential risk from Omicron variant and fragile global cues, in the long run, strong earnings delivery along with positive macro-economic data would hold the key to drive markets upwards,” it says.
Volatile markets
Experts feel that the stock market volatility is expected to intensify because the US Fed’s end of easy money policy and increase in interest rates will make foreign institutional investors invest in low-risk assets. Even the spread of Omicron may derail the nascent economic recovery in the country. Investors must devise an efficient strategy to ride through the volatility. Ideally, they should have an asset mix— invest in large-caps for higher margin of safety and stability and in small and mid-cap for higher growth opportunities. Such a strategy will help counter the volatility and boost the portfolio returns.
Mutual fund investors should look at multi-cap funds which invest in diversified stocks of large-cap, mid-cap and small-cap across sectors. These funds capitalise on the opportunities across market caps and generate optimal returns for investors. Whenever fund managers spot an investment opportunity in mid-cap and small cap segments, the allocation towards them is increased making the funds a high-risk high-return investment proposition. As multi-cap funds will face higher volatility in the short-term, investors must stay invested for five years and above to gain significant returns.
Select funds as per long-term goals
Investors must select funds that have a strong track record and are diversified across investment styles. If an investor is not able to select a fund, then he should ideally invest in passive funds such as Nifty 100 and the Nifty Next 50 as they mirror the index returns.
Retail investors should not be unnerved by the near-term volatility and go for optimum equity allocation as per their long-term financial goals. Sorbh Gupta, fund manager, Equity, Quantum Mutual Fund, says any sharp correction due to near-term headwinds can offer additional valuation comfort and should be used to allocate more to equities with a long-term perspective. “Our 12-20-80 (12x monthly expense in a liquid fund, 20% of the remaining allocation in gold and the rest 80% in equities) approach towards asset allocation navigates near term volatility in different asset classes and can achieve the best possible result for long-term financial goals,” he says.
