Be flexible

investment flexibility
Orange colored ball standing on blue wavy ribbons on blue background, can be used in balance, career growth etc. concepts. (3d render)

Stock market experts are often asked many questions, such as: Which stocks are better to invest now? Growth stocks or Value stocks? Large-caps or mid and small-caps? Which sector looks promising? Financials, IT, autos, capital goods, real estate, pharmaceuticals, FMCG……? For mutual funds, which option is better now, lumpsum investment or SIP? How long will the Fed continue to raise rates? Will the US economy tip into recession? Is it time to move more money to fixed income now? Is it time to book profits?

Investors, particularly newbie investors, are a confused lot. They want quick returns and panic when the market corrects sharply. On the other hand, seasoned investors know that the secret of success in the market is staying invested in high quality growth stocks for a long period and supplementing that investment with SIPs in mid and small-cap mutual funds.

Markets are dynamic and there is no permanent theme. Sometimes value stocks do well; at other times growth stocks do well. Some rallies are dominated by large-caps with insignificant participation by mid and small-caps. Sometimes, mid and small-caps outperform large-caps.

Markets also witness frequent sectoral churns. For instance, in FY 21, pharmaceutical was the best performing sector, thanks to Covid. In FY 22, IT emerged as the best performing sector. In FY23, financials came roaring back with a stunning performance by the least fancied PSU banks. In early FY 24, automobiles, real estate, and capital goods are leading the rally and large-cap IT is struggling. As the sectoral prospects change, market preferences will also change.

There have been periods when bonds and gold outperformed stocks. There have been short periods when the risk-free government bonds delivered returns superior to risky stocks.

In brief, there are no permanent themes; nothing lasts forever. Preferred sectors, segments, themes, assets…come and go. Therefore, investors must be flexible and adapt to the change.

However, it is important to appreciate the fact that some categories of stocks remain strong and continue to perform well irrespective of the market condition. High quality growth stocks, or blue chips in the market parlance, consistently deliver superior returns. They are often market leaders and have a consistent track record of high standards of corporate governance. In India, stocks like Infosys, TCS, HCL Tech, HDFC Bank, Kotak Bank, Bajaj Finance, RIL, Asian Paints, Nestle and Titan have delivered excellent consistent performance enriching their investors.

But mid and small-caps outperform large-caps in the long run. Therefore, mid, and small caps should be an integral part of an investor’s portfolio. It is important to exercise utmost caution in the selection of mid and small-caps, particularly small-caps. This can turn out to be a mine field. Therefore, an ideal strategy to invest in mid and small caps would be to invest in this segment through the mutual fund route, ideally through Systematic Investment Plans. Such a strategy has the potential to deliver excellent returns in the long run. During the last 10 years, the average annual returns from SIPs in mid and small-cap mutual funds were 16.5 percent and 19.22 percent, respectively. History is likely to repeat.

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