28-05-2025
Navigating volatility: Why staggered SIPs make sense for small & mid cap MFs right now
Considering the recent market developments, investors need to be more strategic with their portfolio allocation and should consider a lump sum approach more suitable for hybrid, large cap, and flexi cap
mutual funds
as these categories are considered relatively stable and can absorb
volatility
better, making them appropriate for immediate deployment of capital, according to a release by Motilal Oswal Private Wealth.
On the other hand, mid and small cap strategies are better approached with caution and given the sharp run-up in these segments and their inherent volatility, a
staggered investment
approach over the next 2–3 months is advisable. Any potential market pullbacks in the near term should be viewed as opportunities for more aggressive allocation in these segments.
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Large-cap valuations are now around their 10-year average, while mid- and small-caps still trade at a premium, though select opportunities exist.
In the fixed income space, recent economic indicators point towards a benign inflation trend and rising concerns over economic growth. These factors have prompted the Reserve Bank of India (RBI) to shift its stance slightly in favor of supporting the economy. This macro environment bodes well for fixed income investors, particularly in funds that can benefit from falling interest rates or stable yields.
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'25% - 35% of the portfolio may be invested in Arbitrage Funds (minimum 3 months holding period), Floating Rate Funds (9 – 12 months holding period), Absolute Return Long/Short strategies (minimum 12 -15 months holding period). For tax efficient fixed income alternative solutions, 20% - 25% of the portfolio may be allocated in Conservative Equity Savings funds (minimum 3 years holding period),' the report said.
Motilal Oswal Private Wealth conducted a small study that tracked the journey of the Nifty 50 Index and two actively managed funds in the last 29 years. The study yielded some discoveries of the equity markets of which first was that negative or low return periods were perpetually followed by medium to high return periods. This observation is a simple explanation for understanding that equity returns are nonlinear and tend to be bunched in a few years. Another important finding was that approximately 66.67% of the time one-year absolute returns were positive.
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Secondly, in the case of active funds, there were some further motivating discoveries. In spite of having a poor entry point and suffering negative returns in the first year, the active fund managers were successfully able to produce positive annualized returns on a 5-year period and double digit returns on a 10-year period.
And lastly, compounding has a much larger effect on investment returns than realized and that one should not get easily spooked by negative returns as they will fade with time. When looking at these several data points, the bear markets appear to be like minor speed bumps in a consistent rally, but this is a view in hindsight.
