Don’t go overboard on equities, suggests Bandhan MF; recommends this strategy

Indian markets have been very volatile in the month of October on the back of the escalating Middle-Eastern conflict, rising US bond yields, and increasing oil prices. If these tensions extend, investors fear that it will lead to the US Federal Reserve keeping rate higher for a longer time thus putting pressure on the rupee and hurting foreign investor inflows in India. Investors are now moving more towards safe haven investments like gold and the dollar. The benchmark Nifty index is muted but in the red for the current month.

However, the Indian markets have had a stellar run this year, rising over 8 percent, giving positive returns in 6 of the 10 months so far. The market rose for 5 consecutive months between March and July, rising over 14 percent and hitting multiple peaks along the way.

Meanwhile, it has given double-digit returns in the last 1 year, up 12 percent. Broader markets, on the other hand, have massively outperformed with the midcap index surging over 30 percent in the last 1 year and the smallcap index rallying 35 percent.

The trend is the same for 2023 YTD with the midcap index rising 28 percent and smallcap index advancing 34 percent.

Suggesting an investment strategy on the back of the strong market returns this year, Bandhan Mutual Fund (MF) has advised investors not to go overboard on equities due to high valuations. Given the valuations vs macro tradeoff, it recommended investing in line with asset allocation.

Aggressive Hybrid, Balanced Advantage, Flexicap, and Largecap Funds remain a preferred strategy for the first-time or conservative investor, it said.

"As most global companies have adopted a China + 1 strategy to diversify risk, we recommend investors add a Value-focused strategy as a tool to diversify or broaden core equity allocation Global economy seems to be headed for a soft landing, but the impact of monetary tightening still warrants caution. We prefer domestic plays to global – however, with valuations/election risk this needs to be calibrated," noted the report.

It further pointed out that energy transition globally is a theme that can produce some healthy optionality in utilities, capital goods, cables, etc. Also, sectors exposed to rural/low-end consumption look attractive due to prospects of election spending and waning of COVID/inflation-related balance sheet shocks, suggested Bandhan MF.

Moreover, the report highlighted that the valuation of some quality growth stocks is reasonable now in themes like Internet, Insurance, etc., adding that as nominal growth slows down, niche smallcaps may provide healthy returns.

Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of MintGenie. We advise investors to check with certified experts before taking any investment decisions.