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Which funds to invest in 2016?

A tough ride ahead in 2016 but stay invested.

 Jinsy Mathew   
  • January 25, 2016  
  • |  
  • UPDATED   17:10 IST
Photo: Images Bazaar

The year 2015 has been quiet historical for the Indian mutual fund industry. The domestic mutual fund industry saw stellar inflows totaling almost Rs 75,000 crore, thereby effectively counter-balancing the sell-off from foreign institutional investors. The year once again belonged to small and mid-cap funds, clearly outperforming the large caps. So to which category will 2016 belong to?

Market environment

  • Year 2016 started on a weak note with benchmark indices down 4.7 per cent within the first five trading days, as fears of China hard-landing made a return.
  • This was the second-worst opening to a calendar year since the 2009 financial crisis.
  • Adding fuel to the fire is the 0.5 per cent yuan devaluation by China.
  • Tension between Saudi Arabia and Iran has sent crude prices hurtling to a 12-year low.
  • All these factors have resulted in people worrying if a 2008-type crash is in the offing.
Uncertainties
  • Possibility of a currency war stoking fears of competitive devaluation by emerging markets.
  • The upcoming Union budget and the economic direction it renders.
  • Passage of key bills such as goods and services tax and real estate bill
  • Impact of implementation of 7th Pay Commission recommendations.
Small and Mid-caps to be dethroned?
  • The consensus among mutual fund experts is that the strong rally seen over the last two year is passe.
  • Markets experts contend that ensuing correction is likely to dent a major blow to mid and small cap funds.
  • However, distinct names will continue to perform if earnings justify the current valuation.
  • From a valuation perspective, mid caps continue to quote at a premium compared to large caps which is against the historical trend of largecaps being at a premium.
Large caps to make a return
  • Given the attractive valuation, large caps is one space FIIs will be attracted to when the inflows begin.
Mutual Fund preference
  • Given the above factors, it would be best to opt for multi cap schemes or diversified mutual funds.
  • Mid and small cap schemes should be last in one's order of preference.
  • If earnings revival starts, then largecap scheme is the place to invest.