MARKET GAINS MOMENTUM! What should equity mutual fund investors do now?

The stock market crash of March 2020 had erased a lot of gains from the mutual fund portfolio. But, then against popular perception and opinion, the reversal started to happen. After falling from January highs, the market has covered a lot of ground. Investors also need to understand that volatility is part of the equity markets. Government policies may take time to be fruitful. The global stock markets may show its own volatility thus impacting Indian markets to some extent.

Sensex Performance of Last 6 Months (Source: BSE India)

For a mutual fund investor who has goals to be met over the long term, the current market conditions should not deter them from staying away from the market. Remember, selling units at lower NAVs than the purchase price will be your actual loss. Presently, if the NAVs are down, it is a notional loss.

Investors, especially retail investors in these times, can’t do much about it but are certainly concerned about their portfolio. The only bit of advice most financial planners and industry experts have to offer is to stay calm. The high tide may come but as witnessed several times in the past, the tide will turn and better time will prevail.

Equity mutual funds are meant for meeting long term goals. The underlying asset class i.e. equity is volatile by nature, however, this volatility decreases over time. In short-term, it can be highly volatile while over longer period, it reduces and delivers a return in the range of 12-15 percent as seen in the past. For retail investors, equity MF’s fit the bill when it comes to meeting long term goals such as children's education, marriage, buying a house or financing retirement. All have different investment horizons and require different investment vehicles. If you’re planning to get married next year, don’t hope to finance it with equity investments made today.

For a long term investor, the right time to be present in the market is anytime. If an investor has lined up his goals as to why he needs to invest and then picked the right investment vehicle, then changes in market indices shouldn’t matter much. For long term goals, it’s imperative that you choose equity as an asset class. Several studies in the past over different time horizons and over different market conditions have shown that equities have delivered more than inflation-adjusted returns over the long term. Within equities, rather than investing in direct stocks, choose to participate in equities through equity mutual funds. If and when the market falls, valuations become attractive. Fund houses take this as an opportunity and buy more of the right companies thus averaging out the costs.

Avoid reacting to market index every time it goes up 500 points or loses 800 points in 2-3 sessions. Avoid the temptation to time the market. Rather than timing the market, one should consider, ‘time in the market’. Stick to your plan and make use of the following six points to tide over the current situation.

Stay away from predictions

It’s absolutely impossible for anyone to predict the movement of markets. Stay from predictors at all costs. Factors affecting market movements have increasingly become more complex, interrelated and dependent on global events as well. Further, there are technical factors too at play. When technical support levels are broken by the market, the next level gets projected as the support. But then, markets move in their own way and all these support can be broken. Investing based on predictions could be financially damaging. Be invested in markets till about three years from your goal.

Why SIP is the right approach?

Equity markets are synonymous with volatility and unexpected state of events leading to unpredictability in returns. An ideal way to profit from it is to buy at the bottom and sell at highs. But that’s easier said than done. Much as it is futile to try and time the market, there is a scientific way to keep your purchase price down without having to second-guess the market. All those MF investors, investing through SIP may continue with their SIP’s. And there are convincing reasons to do that. SIP’s are not making all your fund get exposed to market volatility all at once. When the index is down, they get more units while when the index rises, the units bought is less. This approach helps in accumulating units, the average cost of which is lesser than otherwise. The risk of volatility gets minimized through the SIP approach. SIPs are a regular investment plan available on all kinds of mutual fund schemes, though they are the most effective in equity schemes, as equity is a more volatile asset class than debt.

How to invest a lump sum?

With regard to fresh money, the approach gets tricky. If you are looking to invest a lump sum in current markets, tread cautiously. Depending on your goals and risk appetite, invest the amount partly in debt and partly in equity especially through Systematic transfer plan (STP). Instead of putting entire money in equity funds, in STP, funds are initially put in liquid or a debt fund and a mandate is given to keep transferring a fixed amount on regular basis (say, monthly) into the equity fund of the same fund house.

Through an STP, the investor can transfer parts of a lump sum from one MF scheme to another, within the same fund house, at regular intervals. Such a transfer averages the cost of purchase and thus mitigates market-related risks. The investor can first park his funds in a liquid or floating-rate debt fund, and then get it transferred to the scheme (usually equity or balanced) of his choice at regular intervals.

STP works well for investors who have a large sum of money to invest in equity markets but do not have the skill or information to judge market movements and time their entry into the market. Periodic transfer of money to an equity fund would mean that the investor gets more units when the markets are down and the NAV is low, and fewer units when markets are high. Therefore, the STP route will help the investor average the cost of acquisition of units.

Diversify your investments

In case your portfolio is not diversified enough, use this opportune time to do so. As and when reversal happens and economies start to show promising growth, it’s the banking sector funds that outshine. Sticking to funds with long track record of consistent performance helps as such funds have been witness to various ups and downs of several economic cycles and therefore more adept in reacting to them. And remember, over very long periods, equities tend to outperform other instruments.

Limit your exposure to small and mid-cap equity MF’s. Give some more time for the economic environment to come back to a better shape. A diversified fund should serve the purpose as they too have exposure to such medium and small firms. Over time, when the situation improves add 2-4 mid-cap and 1-3 small-cap fund for kicker of a return in your portfolio.

Conclusion:

As a new investor do not be perturbed by market conditions. If your goals are long term, make use of such low index levels to take advantage of equity assets. Start with lump sum if available and also initiate SIP in select funds. Keep funds in same folio for better managing your portfolio. Choose a few consistently performing equity MF schemes. Make sure they have different investment styles and well spread out in terms of market capitalization. Start SIP in them as SIP helps in exposing your funds to market volatility in a systematic manner.

No matter what the market conditions are, one important investment trait that every investor needs to apply is patience. Looking at market correction, many investors have turned to their advisors or made anxious calls to them with questions like whether they should exit their investments, stop SIPs or make changes in the portfolio or assets mix instantly. But the answer to gain out of the potential of equities is to follow the ‘buy it and forget about it’ approach. Earmark SIP’s for separate goals and run them regularly, reviewing them once in at least two years.

Exploit the potential of equities over long term and remember to de-risk when your goals are about three years away. Equity funds will help you generate high inflation-adjusted returns and then by de-risking into debt funds, it will ensure a safe landing to meet your goals at ease.

By: Sanjeev Puri

Published on: Investors India, July 2020 Edition