Investors always face a dilemma when it comes to investing a lump sum amount in mutual funds. Lumpsum investment in equity mutual funds is always riskier as compared to SIP or STP. However, lumpsum investment also has the potential to generate higher returns.
As we write this article in June of 2018, let us look at PE multiples of some indices:
PE Multiples as on 1st June 2018
NIFTY 50 : 27.09
Nifty Midcap 50 : 67.43
Nifty Smallcap 250 : 86.15
Nifty small cap 50 : 242.48
Investors can see for themselves that these valuations are extremely expensive and hence investing lumpsum in equity mutual funds does not seem advisable. Besides valuations, the following 12-18 months have certain forthcoming events that may impact capital markets in a big way.
1. General elections in 2019 : The mandate given by the Indian masses in 2014 seems a thing of the past. It is getting increasingly clear that next government may be a coalition government. This is certainly not good news for the stock markets.
2. Oil in 2018-19 :Brent crude crossed 80$ a barrel. And is likely to remain firm. This does not augur well for inflation in an election year.
3. Interest rates: Yields for 10 year G sec rates have crossed well over 7.5%. There is every indication that interest rates may go up.
4. Other factors: Several other macro factors may affect stock markets negatively. Farm loan waiver and other populist measures are anything but positives for the stock markets. Add to this, the current account deficit that is creeping up.
Now the moot point is where to invest in 2018-19 ?
We at Mutualfundwala, are advising investors to refrain investing lump sum in equity mutual funds. We suggest only STP for a minimum period of 18 months. 18 months seem a good time as dust of general elections will settle down. A big political event will be behind us. It is suggested investors should look at a combination of the following to invest lump sum.
1. Liquid funds
2. Short term and medium term debt funds
3. STP in diversified large cap funds for a minimum time horizon of 18 months.