Choice AMC shares how to invest in equity funds amid market volatility

With equity mutual funds continuing to attract money despite market volatility, investors should focus on asset allocation and valuations rather than chase recent performance, said Manish Jain, Deputy CEO at Choice AMC.

Jain said equity mutual funds have recorded 66 consecutive months of inflows, even as the Nifty has fallen around 14% from its January high.

Strong inflows reflect investor enthusiasm but do not necessarily indicate that markets are safe, he said.

Investors should decide how much to allocate to equities based on their financial goals and risk appetite before selecting funds. Money required within the next five to seven years should generally not be invested in equities, Jain said.

Small-cap valuations warrant caution

Investors are directing a larger share of their money towards small- and mid-cap funds, even as valuation differences across market segments warrant attention, Jain said.

Small- and mid-cap funds accounted for 51% of equity mutual fund inflows in August, while large-cap funds saw combined outflows of around ₹2,470 crore in July and August, according to figures cited by Jain.

Strong inflows measure enthusiasm, not safety, and the market doesn’t care how many months in a row the money has come in.Asset allocation first, valuation second, past performance last.MANISH JAIN, DEPUTY CEO AT CHOICE AMC

The Nifty was trading at around 19 times earnings, compared with nearly 35 times for the Nifty Smallcap 250, which was about 23% above its historical median, he said.

Jain advised investors to retain large- and mid-cap funds as the core of their equity portfolios and treat small-cap funds as a smaller, supplementary allocation. Hybrid funds, which continue to attract around ₹10,000 crore a month, may be an option for investors seeking a more balanced exposure to equities and other asset classes, he said.

Why investors should continue SIPs during corrections

Investors should maintain their systematic investment plans (SIPs) through market corrections rather than stop contributions in response to short-term volatility, Jain said. They can consider increasing SIP amounts as their incomes rise, provided the additional investment is aligned with their financial goals.

Monthly SIP contributions reached a record ₹32,297 crore in August, but investor persistence remains a concern, he said, citing figures suggesting that around 81 SIPs were stopped or matured for every 100 new SIPs.

A market correction allows investors to purchase more mutual fund units for the same contribution, although it does not guarantee gains or rule out further declines.

For investors with a lump sum to deploy, a systematic transfer plan (STP) spread over six to 12 months may help stagger the investment, Jain said. Unlike an SIP, which invests money at regular intervals, an STP transfers money from one mutual fund scheme to another at predetermined intervals.

Which funds may suit a three- to five-year horizon?

Investors with a three-year horizon may consider hybrid or balanced-allocation funds, while those investing for five years or longer may consider a higher equity allocation, depending on their risk appetite and financial goals, Jain said.

He advised investors to prioritise asset allocation and valuations over past performance when selecting funds. The fund house’s investment process, costs and risk-management discipline should also be considered, he said.