Confused about where to invest? ICICI Direct suggests this mutual fund strategy for 2020

According to ICICI Direct, multi-cap oriented funds are the most appropriate category of funds for the first-time or new investors.

These funds offer stability in returns, are less volatile and are, therefore, best suited for long term investment, it added. While in the long run, equity markets have trended upwards, there are many bull and bear market phases within that larger uptrend and within that market phase, a different category of funds like largecap, multicap and midcap/small cap perform differently, the report noted.

"In general, in a bull phase mid-cap/small-cap funds perform better while in a bear phase, large-cap funds outperform. In general, Multi-cap funds are a more stable category with performance in between large caps and mid-caps during all market phases," it suggests.

So should an investor look at funds that have performed better than others in the last year? The broekrage said  the answer was no. It added that historical returns a bad indicator for selection of funds.

No fund outperforms across all investment horizons, but in cycles, hence, investors should be more cautious while investing in the best performing fund, the report advises.

If not looking at last year's returns, so how should one shortlist top fund for investment?

"Investors who are not actively involved should focus on the flagship or the primary multicap funds from major AMCs. The primary focus while shortlisting funds for long-term investment should be on the longevity of the fund performance and its fund manager," explained ICICI Direct.

The long-term (5, 10, 15 years) performance track record, particularly across various market cycles, is the most important aspect investors should study in detail while selecting a fund, the report advocates. It further emphasises that investors should not give much importance to short-term performance as it is often seen that funds that outperform significantly in a short period, underperform in subsequent periods.

According to the brokerage, since equity markets are inherently volatile, doing investment through a systematic investment plan (SIP) is the best investment strategy.

For lumpsum investment, one basic thing one needs to ensure is that investment is made at the lower end of the market cycle, that is when the historical returns are negative or lower than the long term average, the brokerage clarifies.

While mid-caps outperformed large-caps significantly in FY15-18, it witnessed a reversal in trend amid liquidity issues along with the NBFC crisis and other corporate defaults over the past 18 months. This skewed investor’s focus towards quality companies, leading to underperformance of the broader markets, in general.

Despite overall underperformance of broader markets, the brokerage noted that the quality companies in both large-cap and mid-cap/small-cap had done well in 2019 and it expected this trend to continue even in 2020.

"We believe that a stock-specific approach in both large-caps and mid-caps will continue to do well. However, mid-cap and small-cap funds offer a better investment proposition as a stock-specific approach may do well in the broader markets. Hence, a lumpsum investment in mid-cap/small-cap funds at current levels may be considered," the brokerage observed.

However, it added that the core portfolio should always comprise multi-cap oriented funds with accumulation being done through a SIP approach,

SBI Large and Midcap Fund, Sudaram Large and Midcap Fund, and Kotak Emerging Equity Fund are its top picks for the year 2020.