Mutual funds: Largecap, Flexicap, Multicap can be best for investment with rising markets now, says report

Mutual fund investment: The markets have seen high volatility since the start of the month mainly due to the Lok Sabha elections. Initially, the exit polls pushed the markets to a high level, but after the results, there was a massive crash in stock indices BSE Sensex and NSE Nifty 50, where the Bharatiya Janata Party (BJP) fell short of a majority. The Indian benchmark indices, NSE Nifty and BSE Sensex, dropped nearly 6% each on June 4 after the election results.

But with the BJP forming the government yet again for the third term, the markets have shown a sign of recovery since then.

"Before elections, the market responded positively on 03rd June 2024. However, on the result day i.e. June 4, 2024, the greens turned red. Responding to the outcome of the general elections. Many sectors which were considered as government focus saw strong sell off. While elections are a closely monitored event, in the long-term quality of businesses take precedence over sentimental views," a report by Mirae Asset Mutual Fund stated.  

The Nifty 50 Index's valuation at 19.7x FY25E and 17x FY26E is reasonable given the consensus earnings growth of 16% CAGR over FY23-FY26. Earnings growth is broad-based, providing better certainty. 

The report noted over the last 12 months, midcap/small-cap indices have outperformed the Nifty 50 by 30/40% respectively, with some sectors, particularly amongst industrials trading at a premium. Mean reversion is expected in these richly valued sectors. Overall, we don’t see much deviation in current policy construct and expect earnings momentum to continue.

Largecap, Flexicap, Multicap: Investments to consider

The report said investors should invest based on their risk profile and may continue allocating via Systematic Investment Plans (SIPs).

"We prefer large-cap oriented funds and hence any fresh allocations may be made in diversified funds like largecap, Flexicap and Multicap. Hybrid funds, given their flexibility in asset allocation could also be part of core portfolio. In thematic funds investor may prefer consumption fund for expected mass consumption recovery and BFSI fund given the decent risk-reward," the report stated.  

Currently, the flexicap category has 38 schemes with total assets under management (AUM) of Rs 3.50 lakh crore. And with 24 schemes, the multicap category’s AUM is much lower at Rs 1.24 lakh crore. 

In May, large-cap funds received Rs 663.09 crore of inflows compared to Rs 357.56 crore in the previous month. 

"In the long run, earnings may take centre stage when it comes to market movements. This reflects that markets are agnostic of the short-term volatility created by elections and government at the Centre. However, the policies of the government may determine the long-term fate of the market," the report said. 

Mutual fund buying and selling trends

In a comprehensive review of mutual fund trends for May, brokerage firm Phillip Capital highlighted notable increases in investment across several sectors. Specifically, higher purchasing activity was observed in Industrials (with a weightage of 9.3 percent, an increase of 66 basis points month-over-month), Auto & Ancillary (9.1 percent, up 44 basis points), Metals & Mining (3.7 percent, up 11 basis points), Staples (4.7 percent, up 7 basis points), and Building Materials (3.9 percent, up 5 basis points).

Conversely, there were reductions in mutual fund holdings within Financials (28 percent, down 61 basis points), IT (7.9 percent, down 20 basis points), Oil & Gas (6.5 percent, down 19 basis points), Agriculture & Chemicals (2.2 percent, down 16 basis points), and Discretionary sectors (7.2 percent, down 15 basis points). Additionally, cash levels rose slightly to constitute 4.3 percent of AUM in May 2024 compared to April's figure of 4.2 percent.