5 Types Of Mutual Fund Schemes To Consider Right Now
FMP's eliminate interest rate risk by holding their portfolio bonds t maturity, so they would serve as an ideal foil to more rate sensitive long-term debt funds, should you choose to invest into them
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Gone are the days when you could blindly pick a few equity mutual funds by Google-searching "top equity mutual funds", look at your portfolio after a year, and beam with joy! It's quite likely that we're at the cusp of what is going to be an extended range bound phase for the equity markets. With positive cues far and far between and robust 1-2-year earnings growth already having been factored into a lot of stock prices today, a tearaway rally from here remains a distant possibility. Here are five categories of Mutual Funds you should consider right now.
Value funds tend to go against the grain and invest into stocks that are undervalued by the broad market at the moment, as they may have fallen out of favour due to recent developments - for instance, SBI or Bharti Airtel, which are blue chip stocks that are trading nearly 20% or more below their one-year highs. Since we've witnessed a secular bull market in 2017, overvaluation exists across market caps and sectors. In situations like these, value-based strategies typically deliver better returns for patient investors, over a 3-5-year horizon.
Dynamic Asset Allocation (DAA) Funds
DAA funds are an ideal bet for mercurial, moderate risk investors who tend to be swayed by their own behavioural biases. A type of Hybrid Fund, DAA's tend to shave off equity holdings as valuations rise, and stock up as valuations dip. In range bound markets, its commonly seen that investors end up doing the opposite, bearing the brunt heavily on both sides. DAA funds help smooth out returns by ensuring that equity allocations are rationalised.
Credit Opportunities Funds (COF's)
Within the debt fund space, there's a compelling argument for investing into Credit Opportunities Funds right now. These funds pick up bonds that are lower rated than say AAA's or AA's, but have the potential for getting upgraded on the back of improving balance sheets and fundamentals. Large AMC's devote significant amounts of time and resources towards ensuring that the default risk that they take on in these funds are well thought out and measured. A lot of these funds are running with high YTM's in the 9.5% to 10% range, making the worth considering.
Long Term Debt Funds
As the name suggests, Long Term Debt Funds invest into bonds with higher maturities - typically between 8-10 years or more. Naturally, these bonds tend to be a lot more sensitive to changes in interest rates. In fact, with yields having risen heavily in the past one year, a lot of long term debt funds have given flat to negative returns; but this shouldn't necessarily be reason for investors to shy away from them. Bond Yields seem to have already priced in an overtly negative outlook, and we may actually see them heading down if incoming news flows are positive in the next 12-18 months. Investors can take positions in long term debt funds via 12-15-month SIP's or STP's.
3-year FMP's (Fixed Maturity Plans) have become an attractive proposition for low risk-taking investors who don't mind a hard lock in on their funds. With yields on 3 year AA's rising to 8.25% - 8.50%, the spread of potential FMP returns over fixed deposits has become too wide to ignore. Notably, FMP's eliminate interest rate risk by holding their portfolio bonds t maturity, so they would serve as an ideal foil to more rate sensitive long-term debt funds, should you choose to invest into them.