Mid-cap funds should do better in New Year

Thematic funds betting on infrastructure and banks should outperform

Mid-cap funds should do better in New Year
The fortunes of the equity basket of mutual funds are dependent on the equity market. And the New Year promises a lot of prospects for equities, in the sense that a few key variables of the economy, such as interest rates and inflation, are expected to turn favourable in the New Year after having hit their peaks this year.

We continue to be positive in our outlook for the equity market, as we see 2013 as a year of monetary policy easing and expect inflation to come off its highs. We also expect the government reforms agenda to get implemented. The last one is only a hope; when it comes to politics, it’s really difficult to predict anything. Six months back, there was a fear that the forthcoming Union Budget is most likely to be populist in the runup to the general elections of 2014 and deficits will shoot up in the new financial year also.

But Moody’s negative outlook would force the government to tighten its belts and the government cannot really afford to be profligate with things like agriculture debt waiver except for a few waivers here and select social schemes there. I think the government will manage the next year’s fiscal deficit at below 5.1 per cent of GDP. Now, this will be a big positive for the market. All in all, 2013 will be a year of fiscal consolidation and monetary policy easing and we expect them to favour the equity market, which will in turn be a positive for the equity basket of mutual funds.

Within the equity mutual fund basket, we expect mid-cap-oriented funds to perform better vis-à-vis other categories, given the current attractive valuation of several mid-cap companies. In the diversified mutual fund basket, typically the benchmark is BSE200, where 75 per cent to 80 per cent of stocks are large-caps and the rest 25-20 per cent are mid-caps. That being the case, we expect mid-cap funds to do better than diversified as well as large-cap funds. So, my choice would be mid-cap funds, diversified funds and large-cap funds, in that order.

If one wants to have a sectoral bias, funds focused on financials and industrials are expected to perform better as these are interest rate-sensitive sectors. Sectorally, we are positive on financials and consumer discretionary sectors and would be underweight on FMCG, metals, oil and gas and utilities and neutral to underweight on IT. We feel the consumption basket of stocks has become very expensive.

Accordingly, thematic funds betting on infrastructure and banks should do better in 2013 while those focused on IT and FMCG are likely to be laggards. That way, contra funds – though this genre of funds has lost some of its sheen over the past few years – that bet on beaten-down, underperfoming stocks will outperform. Within the basket of thematic funds, there are many others such as capex opportunity fund, some of which could be worth a look.

Another basket of funds is index funds. Given the bullish outlook for the market and various projections for higher index levels, one may get tempted to go in for index funds, which largely mirror the performance of the benchmark indices.

But being from the field of active fund management, we would be biased towards actively managed funds, which generally outperform their equity benchmarks, and are thus better positioned to reward investors more handsomely.

Personally, I would advise investors to stick to a simple product basket. If one is a first-stage investor, it would be ideal to stay with large-cap funds, which are less volatile in returns. But one should always make it a point to consult a financial adviser to plan the composition of the portfolio. zz

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