On February 20, the S&P BSE Sensex experienced a rise of 350 points, reaching 73,057, while the Nifty reached an all-time high of 22,215. Despite the ongoing bullish trend in Indian equity markets, financial experts are advising caution to mutual fund investors, recommending a careful approach and avoidance of heavy investments in riskier market segments.

Data from ACE MF reveals that the Nifty 50 Total Return Index (TRI) delivered returns of 25%, 15%, and 17% over one, three, and five years, respectively. However, certain sectors have witnessed more rapid increases, such as the Nifty Midcap 150 TRI, which rose by 57% in the past year, and the Nifty Smallcap 250 TRI, showing a gain of 67%. Over the last three years, midcap and smallcap stocks have significantly outperformed largecap stocks.

According to a report by Motilal Oswal Financial Services, the Nifty, after a 20% gain in calendar 2023, started the year cautiously, marked by extreme volatility. In January, Foreign Institutional Investors (FIIs) experienced the highest outflows of $3.1 billion since February 2023, while Domestic Institutional Investors (DIIs) recorded the sixth consecutive month of inflows at $3.2 billion.

Simultaneously, systematic investment plans (SIPs) in mutual funds reached a new record of Rs 18,838 crore in January, compared to Rs 17,610 crore in December. Valuation-wise, the one-year forward Price to Earnings (P/E) stands at around 20 times, exceeding the historical average.

Tata Mutual Fund notes that the risk-reward ratio in largecaps is currently more favorable. In terms of strategy, mutual fund investing differs from direct stock investing. Unlike direct stock investors concerned about expensive valuations, mutual fund investors categorize their investments into core and satellite portfolios.

For long-term goals of eight years or more, financial experts advise continuing monthly investments in the core portfolio despite market fluctuations. However, any additional flow or lump sum investments should be directed away from expensive categories. Instead, they recommend allocating extra funds to debt categories or less aggressive equity categories to protect against downsides.

Considering the potential fall in interest rates later in the year, investors are urged not to overlook the debt asset class. In cases where portfolios become skewed towards equity, gains should be switched to debt. Rebalancing the portfolio is also suggested if midcaps and smallcaps become a disproportionate part, taking exit loads and taxation into consideration.

Deepak Chhabria, CEO & Director of Axiom Financial Services, recommends a cautious approach for lump sum investments in smallcaps due to potential sharp drawdowns. The decision to alter mutual fund investment strategy should not solely rely on reaching a specific Nifty level; factors such as overall financial situation, goals, risk tolerance, and the need for diversification should be considered.