Market correction is the talk of the town. The Sensex was trading at around 36,000 levels during end January. Fast forward one month to March and Sensex is trading around 33,000 – 34,000 levels.

As it is evident, the markets have corrected a lot. Moreover, the volatility is still ongoing. For example, the Sensex fell by over 400 points today.

Overview

During end January, there were concerns among investors, analysts, fund managers and industry pioneers alike. Such concerns were primarily regarding markets in general and small and mid-cap stocks, in particular, being overvalued.

Moreover, the high valuations in the market were not backed by substantial earnings growth from the companies.

On the contrary, as per various trends, private consumption was on a decline and therefore earnings of the companies were impacted.

Additionally, the government consumption was one of the major driving factors in the economy.

On the 1st of February 2018, Finance Minister Arun Jaitley re-introduced long-term capital gains at the rate of 10% on the sale of equity shares or equity-oriented units of mutual funds. This LTCG tax was introduced on gains only over ₹1,00,000 factoring in the grandfathering clause.

Read: What is Grandfathering?

This triggered a correction in the Indian stock markets. People were apprehensive that their earnings would be significantly impacted by virtue of the tax imposition.

The LTCG tax was coupled with rising bond yields. Rising bond yields have an inverse relation with the price of bonds. Therefore, the prices of bonds decreased due to an increase in the bond yields.

If we have a look at the macros of the economy during end January, equity as an asset class for trading at an all-time high. Therefore the valuations were expensive and moreover they were not backed by earnings.

At the same time, bond yields were on a rise, in turn pulling down bond prices. Thereby making bond an attractive asset class, especially over equities.

Post correction, there were many external factors that accentuated the correction. Some of them being the PNB scam followed by the Rotomac scam. This highlighted the grave problem of NPA among public sector banks in India.

A global sell-off kept the market on its knees.

Therefore, the continued correction over February was a cumulative result of global sell-off in January, rising bond yields, high valuations of market/ stocks, lack of significant rise in earnings, rising PNA problem and PNB scam among others.

Budget Impacts

The introduction of Long-term Capital Gains at the rate of 10% on equity shares and equity-oriented units of mutual funds supposedly acted as a trigger for market corrections.

Even though the said LTCG provision was applicable from April 1, 2018, after taking into account the grandfathering clause, the public sentiments were hurt.

Read: 10 Things to Know About LTCG Tax

The fear of depleted earnings started the domino of a global sell-off. The result was reflected in the form of red figures throughout Nifty, Sensex and other indexes.

 

Large-Cap

Large-cap mutual funds are types of equity mutual funds in which the fund invests in stocks of companies having large market capitalization.

Companies with large market capitalization have strong corporate governance and are already proven in the industry. They have an endeavor to provide better capital appreciation over the long term. Being financially strong, they have the capability to bear the market downturns.

Therefore, these funds are less risky, as compared to mid-cap and small-cap stocks.

Nifty 100 aims to benchmark, track and measure the performance of 100 large market capitalization companies from diverse sectors in the economy.

Some of the prominent scripts under NIFTY 100 are Reliance, TCS, HDFC Bank, ITC, Maruti Suzuki, Infosys, SBI, ICICI Bank, Bharti Airtel, Sun Pharma, Hind Zinc, Tata Motors, M&M, Hero Motorcorp among others.

As evident these stocks comprise most major sectors of the economy across banking and financial services, telecom, FMCG, Pharmaceutical, automobile, metal, oil, and gas among others.

The large-cap stocks are fundamentally less risky and therefore less volatile to market fluctuations. However, the market correction was so impactful that even the large-cap stocks were not spared.

Nifty 100 which is representative of the major large capitalization stocks fell to 10,500 levels from 11,500 levels in January 2018.

The reason could be attributed to overvaluations, the imposition of long-term capital gains tax, and lack of earnings backing among others. A slowdown in private consumption is also one of the major factors affecting the economy in general and large-cap stocks in particular.

This index also comprises of the banking sector stocks and this sector is plagued by NPA problems. Pharma sector which had been performing well over the past few years was affected due to changing regulations.

Sun Pharma, for example, has been volatile due to the inspection in its Halol plant.

Other sectors have also been impacted by the slowdown in growth, consumption among others.

Large Cap Mutual Funds

 Mirae Asset India Opportunities Fund

This is one of the best performing Large Cap funds with superior returns beating the benchmark index and a 5-star rating by Groww.

The top holdings of this fund are HDFC Bank, ICICI Bank, SBI, Reliance Industries, ITC Ltd among others.

The fund has had to bear the brunt of the recent stock market correction. Even though being a large-cap fund, and a well performing one at that, the fund saw its NAV dive almost 10%.

Its NAV was at ₹50 levels in January before the correction. As of now, the NAV is down 10% and is at ₹45 levels.

Mid Cap

Mid-cap funds invest in stocks of mid-sized companies. The size of these companies is decided based on the market capitalization of the companies.

Mid-cap companies lie between 100 and 250 on the scale of market capitalization. Such companies are considered to be developing companies with established businesses.

Mid-cap funds tend to be riskier than large-cap funds but at the same time offer higher returns and growth opportunities.

Nifty Midcap 50 is a representative of mid-cap stocks and aims to benchmark and track the scripts in this sector.

Some of the prominent scripts in this index are MRF, L&T Finance, NHPC, Reliance Power, Siemens, Jain irrigation, Godrej Ind, Bank of India, Allahabad Bank, Biocon, and India Cements among others.

As evident from the list, the stocks cut across different sectors in the economy ranging from banking and finance, automobile, Infrastructure, power, and others.

This benchmark index was trading at 5700 levels in January and now has declined to 5000 levels.

As mid-cap stocks are riskier than large-cap stocks, they are also more volatile.

The recent market correction has had a significant impact on the mid-cap sector. Most of the scripts across different sectors in this index have witnessed a drop in the value.

Overvaluations and lack of earnings backing have played a role in this volatility.

Mid Cap Mutual Funds

L&T Midcap Fund

With one year returns in excess of 23%, this mid-cap fund is one of the best-performing ones. No marks for guessing why this fund has a 5-star rating by Groww.

The fund has consistently beaten the benchmark index with 5-year returns of almost 30%.

Some of the top holdings of this fund are Emami Ltd, Sundaram Finance Ltd, Mindtree Ltd, Ramco Cements, Jindal Steel and Power among others.

However, the fund saw a fall in its NAV from ₹155 levels in January to ₹140 levels in March 2018. On a positive note, being a mid-cap fund, this fund has done well to save itself from the market correction in comparison to other funds in the similar category.

Small Cap

In small cap funds, a large portion of the investment is done in companies with small market capitalization i.e. having a market cap of less than INR 500 crore.

Most of the small-cap funds invest around 60-90% in small caps and rest in mid-caps and large caps to provide some stability to the investment.

Small-cap funds are a highly risky investment as compared to large cap fund category due to their exposure to high performing equities.

Nifty Small 100 index is a representative of the small-cap stocks and is used as a benchmark to track its performance.

Prominent scripts in this index are Graphite India, UCO Bank, Radico Khaitan, Andhra Bank, Fortis Health, GMR Infra, Avanti Feeds. Ceat, Future Enterprise among others.

Small-cap stocks are more volatile as compared to large-cap and mid-cap stocks. The recent market correction took a toll on small cap stocks as well.

This index fell from 9650 levels to 8150 levels. In terms of the severity, we can identify that this index has had a great fall.

Factors such as overvaluation, NPA, LTCG tax are applicable to this sector as well and have played a role in the correction.

Small Cap Mutual Funds

HDFC Small Cap Fund

With one year returns of over 36%, this is one of the best small-cap funds. This 5-star rated fund by Groww, has lived up to its investors’ expectations by providing excellent returns.

Being a small-cap fund, it was affected by the recent market corrections. It saw its NAV fall 10% from ₹48 to ₹43 levels.

However, given the fact that the fund belongs to the high risk – high return category the fund has done well to restrict its downside.

Some of the top holdings of this fund are Dilip Buildcon Ltd, KEC International Ltd, Aarti Industries Ltd, TV Today Network Ltd among others.

Infrastructure

“Budget 2018 recognizes the role of infrastructure sector as a growth driver. The finance minister has again shown interest to develop smart cities and bullet trains, but more action is expected on the ground level. Provision for rationalizing linkages of coal to power to railways have been made to make it more efficient. For oil and gas industry, rationalization in duty and cess structure has been proposed for petrol and high-speed diesel. To promote renewable energy sector, it has been proposed to fully exempt customs duty on import of solar tempered glass.” said Mr. Hemal Zobalia, Deloitte India.

The 2018 budget saw a lot of focus on this sector. Some of the measures introduced and re-focused by the government are Housing for All by 2022 under the Pradhan Mantri Awas Yojana (PMAY), Smart Cities mission and AMRUT programme.

The government earmarked a total capital outlay of ₹5.97 lakh crore in FY 18-19. 51 lakh homes are planned to be constructed in the rural area.

Despite the government push and support Nifty Infrastructure saw a decline from 3700 to 3300 levels.

Nifty Infrastructure is a benchmark index to measure and track the performance of the infrastructure sector in particular. Some of the industries covered under this sector are power generation and distribution, civil construction, telecommunications and service among others.

Notwithstanding the decline, infrastructure as a theme is expected to perform well in the coming future. The correction can be considered as a temporary phenomenon.

Premium stocks such as Adani Ports, GMR Infra, BHEL, Power Grid Corp among others have registered solid growth levels of as high as 50% in a year.

The budget is expected to provide a fillip to this industry and the sector is expected to perform well in the medium to long-term.

Infrastructure Sector Mutual Fund

L&T Infrastructure Fund

 This sectoral fund in the infrastructure category has been rated 5-star by Groww. It has consistently beaten the benchmark NIFTY Infrastructure index. Its 3-year and 5-year returns have been 16.52% and 24.14% respectively as compared to 1.88% and 5.05% for the NIFTY benchmark index.

Its NAV fell more than 10% from almost ₹20 levels to ₹17 levels. However, the fund has done well as compared to its peers in the similar sector.

With top holdings in Ramco Cements, Graphite India, Hindustan Zinc Ltd among others, this fund is expected to bounce bank riding the focus given to this sector by the government.

Banking Sector Index

The banking sector is represented by the Bank Nifty (index). This index is comprised of 12 banking scripts. The scripts include both public and private sector banks.

This index provides investors, analysts and market intermediaries a benchmark to track the performance of the banking sector in India.

Fundamentally this index is same as Nifty or Sensex which are representative of a group of sectors.

The bank Nifty comprises of major banking stocks such as HDFC Bank, YES Bank, Axis Bank, ICICI Bank, Kotak Mahindra in the private bank category.

Similarly, the public sector banks category comprises of SBI, Punjab National Bank, Canara Bank and Bank of Baroda.

Following the entire market trend, Bank Nifty index too was trading at high valuations in January. From the levels of 25,500 in December 2017, it ran up to the levels of 27,500 by end January.

Then as the market fell, this index followed. It kept on falling continuously to touch levels of around 24,000 in March.

The major factor in play towards this decline is the rising NPA problem in the Indian banking sector. Accompanied with the LTCG tax introduced in the budget, were the PNB scam and the Rotomac scam.

These scams highlighted the inherent weakness in the lending mechanism of Indian banks in general and PSU banks in particular.

The PNB scam alone was to the tune of about ₹13,000 crore, that too from a single branch of the concerned bank in Mumbai.

Bad loans have been a major deterrent to the growth of the Indian banking sector. Moreover, given the importance of the banking sector in any country, it has also hurt the economy’s growth prospects in general.

The Indian government along with the Reserve Bank of India (RBI) have been putting efforts to reform the Indian banking sector and solve the bad loan or NPA problem in the country.

However, measures like Bank Recapitalization have been so impactful. Unless the core of the lending problem is resolved, such measures shall only be a short-term measure.

The share price of Punjab National Bank had registered astounding gains of more than 50% in a single week on the backdrop of the bank recapitalization move. However, the script could not retain this momentum.

The share price along with the public sentiment and confident in this stock took a hit on the news of the PNB scam. The decline continued and the script is trading at below ₹100 levels at present.

India’s largest public sector bank SBI had a similar fate. Given its exposure in most of the high profile lending cases and increasing number of NPA cases, the state bank has suffered a lot.

The share price has declined from ₹325 levels post-recapitalization news to ₹250 levels at present.

Private sector banks like YES Bank, HDFC Bank, Federal Bank have all declined from their December – January levels.

Banking and Financial Services Mutual Fund

Aditya Birla Sun Life Banking and Financial Services Fund

This sectoral fund belongs to the banking and financial services category. This 4-star rated fund saw its NAV decline over 15% from ₹29 to ₹26.5 levels.

The entire banking sector has been under the radar, taking continuous blows from the rising NPA problem, PNB scam followed by Rotomac scam.

Some of the top holdings of this fund include ICICI Bank, HDFC Bank, Yes Bank, PNB, DCB Bank, Bajaj Finance Ltd among others.

From the Horse’s Mouth

Raamdeo Agrawal, MD, and Co-founder of Motilal Oswal Financial Services believes that a little bit of correction is good for the markets. It is true that there are some political and economic headwinds. However, there is no reason to worry or to press the panic button yet.

The correction gives the opportunity for the market to fall in line with earnings and therefore to its true valuations. This is a healthy sign for the markets.

He believes that investors are looking for opportunities to invest in case the markets correct further. According to him, the investor sentiment is very positive and stable.

Manish Sonthalia, VP and Fund Manager, Motilal Oswal Mutual Fund opines that there could be further 4-5% downside on the headline numbers.

Mihir Vora, Chief Investment Officer, Max Life Insurance said “Given the fact that elections are lined up, government spending on infra is visible. We will also see support for farm and rural segment, which should boost sentiment. Linked to this is also the fact that credit growth will be supplied by the private sector financials and they will continue to perform well. With corporate tax cuts, increased spending is seen in IT firms, which also have a greater focus on digital space. The fear of marketing margins not sustaining has not prevailed among these firms and that theme is looking good.”

Balanced Fund: The way out

balanced fund is a fund which combines a stock component, a bond component and sometimes even a money market component into a single portfolio. These are also known as hybrid funds. These are preferred by investors looking for a mixture of safety, income, and modest capital appreciation.

These funds invest 50–75% in equity and rest in debt. Equity is mostly large-cap companies whereas debt is mostly long-term debt.

Due to their allocation in both debt and equity, they serve valuable to investors in times of market volatility and correction.

The investment in safe debt category acts as a hedge, thereby restricting, limiting and reducing the downside.

Balanced funds can be a good way ahead to remain invested and deal with market correction at the same time.

ICICI Prudential Balanced Advantage Fund

This fund has been one of the few funds to withstand the recent market corrections in a reasonable manner. This 4-star rated fund which has delivered over 15% returns in the past 5 years, saw its NAV decline to a very small extent and is already trading at the January levels of ₹33.

Some of the top holdings of this fund are HDFC Bank, Reliance Industries, 6.68 GOI September 17 2031 gilt bind among others.

Conclusion

Market correction is a natural phenomenon and keeps taking place from time to time. An attempt to time the markets may be counterproductive for the investors.

Over the longer investment horizon, such fluctuations get ironed out and wealth is created for the investors. Therefore investors must not try to time the market and remain invested in the long-term.

With the given objective, it may be a better idea to invest in mutual funds via Systematic Investment Plan or SIP, than invest via lump-sum at the present moment.

The reason being that it is not certain that the markets could not correct further. If that happens, investment via lump-sum would not work well.

However, investment via SIP would overcome this problem due to the benefits of rupee cost averaging. As the fund is able to pick/buy units at different prices (both high and low), volatility is overcome.

When an investor chooses to invest via SIP scheme, even if the markets fall, the scheme is able to pick up more units with the same investment amount and vice versa. Whatever may be the course of the market, the investors stand to gain.

In that balanced funds may be a good choice in terms of securing both risks and returns.

More: 30 Best Funds to Invest in 2018 – Groww 30. 

Happy investing!

Disclaimer: the views expressed here are of the author and do not reflect those of Groww.