The Mutual Fund Show: Focus On Debt Funds And Defensive Themes, Say Financial Advisers

After seeing robust returns from equities in 2023, financial advisers suggest investors lower expectations for the current year as most mid- and small-cap stocks have become expensive.

They recommend investors to go stronger on debt funds. "Today, interest rates are at their highest levels and we want to take advantage of that from debt side," said Ruchi Sankhe, investment advisor at Infinity Advisors. She suggests constructing a portfolio with a longer tenure on the G-Sec side.

Fixed income could be a good place to be in, according to Vishal Dhawan, founder and chief executive officer at Plan Ahead Wealth Advisors Pvt. "You can have some amount of accrual through short-term funds and some amount of duration coming as well."

He recommends buying international funds doing debt. "That could be a play to lock-in some yields overseas and maybe get some additional arbitrage through rupee depreciation," Dhawan said.

In terms of equities, both suggest investors exercise caution. Value funds did well in the past because of the outperformance of mid caps and small caps, Dhawan said. Investors should consider a value fund, which comprises only 15-25% of mid and small caps, as they have become expensive, he said.

However, Sankhe said that it is important to have a blend of value and growth funds and create a diversified portfolio. She advises investors to focus on the composition of value and growth funds, rather than market capitalisation.

Even though caution is advised, funds will continue to perform, as "India is strongly positioned and I would not go too underweight from here onwards, given predictable election outcome and JPMorgan's GDP growth outlook," she said.

Both analysts advised against thematic funds and recommend defensive themes, including healthcare and information technology, in 2024.