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Aarati Krishnan

Waiting for a market correction may be tricky as it is not easy to tell when one will come along or how long it will last. So, while investing in an equity fund, prepare for some downside risk in the short term, however well you time your initial investment.

I prefer to invest in equity mutual funds when a 500 to 600-point correction happens in the stock market so that I can have a margin of safety on the NAV. I have listed my top preferences: Reliance Vision, Franklin India Prima Fund, Alliance Equity, DSP Opportunities Fund and Franklin India Bluechip. Is my choice right? How can I allocate money across these funds?

Ravi

Timing can make a big difference to your returns from equity mutual funds; so you may be right in wanting to enter equity funds when the stock market declines. When you enter an equity fund after a period of sharp appreciation in stock prices, your investments do carry a higher downside risk than would be the case if you invest during bearish market conditions.

But having said this, the problem with waiting for a correction is that it may take a long time to come along, or may not materialise at all. This could mean missed opportunities for you as an investor and lead to a needless delay in your investment decision.

Even if a correction does happen, it would be quite difficult to invest in the midst of one, because it would be impossible to tell if the correction is indeed over, or if there is more to come.

All this suggests that if you would like to invest in equity funds, you do have to prepare for some downside risk in the short term, irrespective of how well you try to time your initial investment.

To reduce these risks, we would suggest that you use systematic investment, that is, invest small sums in equity funds every month, so that you do not expose a very large part of your portfolio to a sharp reversal in the stock market, at any given point in time.

In addition, you could also make use of opportunities created by external events, such as, for example, the market crash after 9/11 or the stock market decline on May 17, to take additional exposures to equity funds.

Coming to your choice of funds, each of the funds you have listed does have a reasonable long-term track record. However, based on our analysis over the past few years, funds such as Franklin Bluechip and HDFC Top 200 would be our top preferences for your core portfolio based on their risk-adjusted performance and ability to handle market downturns.

However, these are large-sized funds with a focus on large-cap stocks. The addition of mid-cap stocks to your portfolio could help you earn a higher return (albeit with a higher degree of volatility). You can consider adding either HDFC Long Term Advantage Fund or Reliance Vision for a mid-cap exposure.

Your allocation between the large- and mid-cap funds would depend on your risk preferences. You can probably allocate your money equally between these four funds, as this would leave you with a 25 per cent exposure to mid-cap funds.

(Queries may be e-mailed to mf@thehindu.co.in, or sent by post to Business Line, 859/860 Anna Salai, Chennai 600002.)

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