Your Mutual Funds queries: With markets at new highs, make investments by way of SIP or STP. Preserve threat urge for food in thoughts

As the markets are touching new highs, should I invest lump sum money in equity for higher returns?
—Gautam Kishore
Valuations play an important role while entering any asset class. Lower (cheaper) valuations reduce the risk of drawdowns (or negative returns) and improve upside potential, and vice-versa. Since the lows of March 2020, equities have rallied sharply with benchmark indices almost doubling till date (as of January 12, 2021). The sharp market rally has resulted in seemingly stretched valuations, which has toned down future return expectations from equities. It is advisable to invest in a staggered manner, say via SIP or STP (Systematic Transfer Plan) modes. SIP or STP modes of investment facilitate regular investments at periodic intervals, enabling an investor to average out the cost of their investments. This benefits investors in falling markets since they would be buying units at cheaper prices.

Allocation to equities should be in accordance with the risk profile of an investor. Higher the investment horizon and risk appetite, higher can be the allocation to equities, which have the potential to deliver positive real returns (more than inflation) over the long term.

There are mailers from various fund houses with the title change in fundamental attributes of a multi-cap fund to flexi-cap fund. What are the changes?
—K R Krithika
In September 2020, SEBI released a circular mandating multi-cap funds to invest a minimum of 25% each in large, mid and small cap stocks. Following requests from AMFI, the regulator came up with a new ‘flexi-cap’ category in November 2020, which would allow funds to invest across market-cap segments without any restrictions. This would help existing ‘multi-cap’ funds transition without too much of a strategy or style disruption, by positioning their funds as ‘flexi-cap’ funds. Such changes to a scheme are treated as ‘change in fundamental attributes’. Investors may choose to exit or reduce exposure to the concerned scheme under the load-free period, if the same is being retained under the ‘multi-cap’ category, to re-align the portfolio with their target market-cap split in line with their risk profile.

The writer is director, Investment Advisory, Morningstar Investment Adviser (India). Send your queries to [email protected]