Explained: Where to Invest Amid Market Index Divergence

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The Sensex and Nifty are trading at record highs, and retail investors are always excited to participate in the stock markets. But the free ride may be over, and all you invest may not increase. In fact, the month of August saw a clear divergence in performance between the different indices. While the benchmark Sensex rose 5.8% in August to trade above 55,500, the mid-cap index only rose 0.1% and the small-cap index is down 2%. Investors moving from mid and small caps to blue chip companies in an environment of high valuations is an indication of caution in the market and a signal for retail investors to follow an appropriate strategy. As investors weigh their options between waiting for a correction and missing out on a possible rally, experts say they would do well to follow a systematic transfer plan strategy instead of a lump sum investment, and opt for funds at large cap or funds in the diversified or hybrid category.

What should an investor consider?

Both fund managers and investment advisers see the current market situation as delicate: although there are valuation concerns, there is also a possibility of a further rise in the markets in the wake of high liquidity. current and hopes for a resumption of economic activity. So while valuations may not look very attractive, there is also no major predictable reason for a correction. In addition, corporate earnings were also favorable. While risks exist in the form of the US Federal Reserve announcing a slowdown in its monetary stimulus program, as well as the likelihood of a third wave of a pandemic, market experts say most ‘among them are factors known and widely taken into account in the price. .

The US Fed is expected to meet for its annual August political retreat later this month. Thanks to his stimulus measures, he is now buying bonds worth $ 120 billion every month.

So while investors can continue with their existing investments, they would be wise not to put in lump sum investments and can instead opt for arrangements such as a systematic transfer plan (STP).

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Where to invest

As the market rally is driven more by liquidity and becomes more and more expensive with each rise, an unexpected setback can cause a correction and may first impact companies in the mid and small cap segment.

Experts say that in this awkward zone in terms of valuation and fear of losing on a rally, it’s time to get into large cap funds or companies. While they offer better protection during a downturn, investors can also look to companies that have significant operations outside of India.

“We must avoid small and even mid caps at this time. Investors should opt for large cap, flexi-cap or hybrid funds and the best way to do this is to use STPs instead of investing a lump sum, ”said Surya Bhatia, Founder of AM Unicorm Professional .

How does an STP work?

An STP allows an investor to give consent to a mutual fund to periodically transfer a certain amount from one plan to another at fixed intervals. This facility allows for a staggered deployment of funds and helps the investor to profit from a market correction.

For example: if an investor wants to invest Rs 10 lakh in stocks, instead of investing everything at once, he can invest a lump sum of Rs 10 lakh in a debt mutual fund and then set up a STP of a certain amount in an equity fund.

The investor must select a fund from which the transfer is to take place and a fund to which it takes place. Transfers can be weekly, monthly or quarterly depending on the STP chosen and the options available from the management company.

In a volatile situation, while an STP offers protection to the part of the investment that remains parked in a debt fund, it also helps investors to average the cost of the investment.

“A cautious investor can go for a 12 to 24 month STP where the fund can be diverted from debt to equity funds – large cap, flex cap or hybrid funds. One can do a weekly STP where Rs 1 lakh can be placed in a debt fund and it can be invested in an equity program on 50 weekly installments. This provides a good average of rupees, ”said Bhatia.

What are the different types of STP?

Along with simple STPs, mutual fund companies offer innovative variants such as Flex STP, Formula-Based STP, and STP Booster. Under Flex STP, an investor can put money into a debt fund which is then transferred to an equity fund based on the P / E (Price to Earnings) band of the Nifty 50 index. In case of STP Formula-based, as the name suggests, STP amount is decided on the basis of a formula. There are several fund houses that offer either of these variants of STP.

Booster STP is a newer option, recently introduced by ICICI Prudential Mutual Fund. This allows an investor to invest varying amounts in equity funds depending on the market valuation. While the investor is required to provide a base payout amount (amount intended to be transferred) and the frequency of the transfer – which can be weekly, monthly or quarterly – the STP booster gives the fund company the ability to do so. vary the payout amount from 0.1 × to 5 × the base amount, and this is based on the fund house’s equity valuation index. This means that when the stock market valuations are very expensive, the STP payout amount would go down to 0.1x, and when the valuations are attractive, they can go up to 5x. Thus, on a basic payment of Rs 10,000, the amount of the investment can vary between Rs 1,000 and Rs 50,000.

Thus, compared to a traditional STP, in an auxiliary STP, the amount of the payments and the frequency of the transfer are variable and are decided by the fund company according to the investment opportunity that it sees.

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