Why Equity Mutual Funds are Hot Again

The markets are trading at lifetime highs, backed by good quarterly results, improving economic outlook and a decline in Covid cases.

Against this backdrop equity, mutual fund investors, after withdrawing money for months, have stepped up their investments as confidence among the investing fraternity soars higher. For the first time since February last year, equity mutual funds have seen an inflow of 10,000 crores in May 2021. The redemption pressure too is waning. The best is yet to come.

Many were afraid to buy during corrections due to high volatility, but with volatility subsiding, those who were waiting on the sidelines have jumped the bull bandwagon. Investors realised that the longer they wait, the more they will miss out on dividends and growth. The underperformance of debt funds, too, have contributed to the gung-ho attitude of equity investors. It should be noted that the debt category reported outflows of Rs. 44,000 crores in May 2021.

The gradual decline in Covid cases too has had a calming effect on investor sentiment. This has made investors risk-friendly, and they are allocating more money towards equity mutual funds. Investors are flocking to hybrid funds since they are not as risky as equity funds. Hybrid funds invest 65 per cent in equity and the remaining amount is invested in debt securities. The debt hybrid fund invests 60 per cent or more in debt and the remaining amount is invested in the equities. Hybrid schemes such as dynamic allocation or balanced funds have seen good inflows. In May 2021, the hybrid schemes reported inflows of more than Rs. 6,000 crores.

Change in risk perception is perhaps one of the most important factors that have contributed to a renewed interest in equity. What is interesting is that a class of investors that have found comfort in the safety of fixed deposits have now begun to embrace risk for higher returns. One should note that Bank deposits grew at 9.7 per cent as of May 21 as in comparison with around 11 per cent a year ago. Investors are realising that growth in the long term comes from dividend and interest. Therefore, equity and hybrid funds are witnessing renewed interest from investors.

Remember the markets will never make perfect sense. If you have a long-term goal the timing really doesn’t matter. The markets might not up infinitely, but the history of the past 50 years clearly shows that long-term investing always wins regardless of where the market is today. By investing through SIP, one can also take advantage of cost-averaging if the markets correct by 5-10 per cent. 

However, while investing one should consider one’s risk appetite and invest accordingly. The mutual fund universe is vast. It can appear confusing at times. While equity and hybrid funds offer capital appreciation opportunities, it requires expertise to evaluate them. It is best to seek the advice of a qualified financial planner who understands the nitty-gritty of the markets. He can help you devise a strategy to build a weather-proof portfolio that would stand tall in all seasons. Successful investing is all about capital appreciation by creating a balanced portfolio.

The author is Founder, Investonline.in

DISCLAIMER: Views expressed are the author's own, and Outlook Money does not necessarily subscribe to them. Outlook Money shall not be responsible for any damage caused to any person/organisation directly or indirectly.