Why does it makes sense to invest in attractively valued stocks through mutual funds?

Stock markets are in a bearish phase. The quantum of selling by foreign institutional investors has exceeded the inflows generated by Indian investors--retail as well as institutional. Since the beginning of the year, the Nifty 50 index has fallen by 11.18% to touch 15,413 from 17,354. However, it does not give the true picture of the losses investors incurred. The situation is grim as 83% of the Nifty 500 stocks are in red in CY2022. 15 out of 50 stocks of the Nifty are trading near their 52-week lows with losses in the range of 8% to 40% this year.

Well-placed large-sized stocks have not fallen steeply. But small-and-mid-cap stocks have fallen more sharply. Investments of a large number of small investors have been eroded. Individual stocks have lost up to 80 percent of their value.

Some of the prime IPO names such as One97 Communications (PayTM) and Nazara Technologies are down 53% and 56% respectively in the CY2022. Some of the worst-hit stocks in the current turmoil were the most sought-after stocks in the last year when the stock market was trending up.

In the backdrop of these facts, investors have to re-evaluate their approaches to investing. An approach that can stand in good stead for investors is investing in mutual funds to seek exposure to attractively valued stocks.

Why mutual funds?

In recent years, investors participated in the bull market which was fueled by liquidity. A large part of this liquidity found its way into new-age themes and businesses. But it seemed investors undermined the importance of cash flows as high liquidity supported high stock prices.

Most investors began chasing momentum in stocks at the expense of quality of earnings. However, this approach rarely works in the long term as fundamentals catch up.

Actively managed mutual fund schemes are more effective as these schemes aim to build portfolios of good quality stocks which can deliver high returns in the medium to long term. In actively managed equity schemes, portfolios are designed keeping in mind investment objectives and asset allocation of schemes.

A key aspect which investors need to bear in mind is that they are largely better off by investing in equity schemes than plain exposure to individual stocks. Let’s look at some recent numbers.

Large cap equity funds on the average have lost 10.9% returns since the beginning of the year and in line with the fall in Nifty 50 index. The worst performing actively managed equity fund has lost 15% over the same period of time, whereas there are large cap stocks which have lost much more.

Take the case of small cap funds which are seen as the more volatile lot. The NiftySmallCap250 index is down 20.6% in CY2022. Over the same period of time all small cap funds on an average lost 16.63%. The worst performing small cap funds have lost 26%. As opposed to this, individual small cap stocks have lost up to 80 percent of their value.

Robust risk management by the diversified equity fund managers ensures that they fall less when the times are tough. Focus on good quality stocks also ensures that these portfolios tend to spring back in action when the stocks bottom out as the first wave of money goes to good quality stocks.

So, if you are one of those who are searching for Best mutual funds to invest in 2022, then performance of some of these schemes in this downfall should provide some clues.

Top equity mutual funds not only do well in an upward trending market but also help you contain the downside when the markets are falling like a pack of cards. Best mutual funds to invest in India may be those where fund managers allocate money to fundamentally strong stocks. This approach can provide you higher returns than the broad markets.

The Road Ahead

If you do not have skills or the time to select stocks and track them, then it is better to invest in mutual funds as they are managed by well-experienced fund managers.

But before doing this, you must know and be clear about your financial goals and prepare an asset allocation plan to achieve that financial goal. Allocate money to equities through well managed diversified large, mid and small cap equity funds. Depending upon your risk taking ability and available time on hand to achieve your financial goal, you can decide allocation to each of these within overall targeted allocation to equities. Here is a list of some of the well-managed equity funds.

In all risky assets, including equities, the timing risk needs to be managed with utmost care. The best way to reduce the timing risk is to stagger your investments. In a falling market, most investors want to wait it out till the markets bottom out. However, such market bottoms are spotted only in hindsight. Hence it is better to start deploying money gradually through systematic investment plans. If you have a large sum to invest, park it in an overnight or liquid fund and opt for a daily systematic transfer plan which will help you deploy all your money in a month or two.

Start your journey towards wealth creation now. The best of the investment opportunities come in the worst of the times. And well managed mutual fund schemes can help you tap them.

Do not know if you should add more to the stocks you are holding? Here is a solution worth a look:

Mutual Fund schemes are not multi-baggers in the medium term, but they are wealth creators. Click here to know more.