Managing mutual funds during volatile market
The equity markets have remained volatile for the last few weeks, though the crude prices are heading south, the cheer is not likely as the reasons for the dive in prices is purely not due to the surplus in supply but to do with the concerns of the world economic growth
The equity markets have remained volatile for the last few weeks, though the crude prices are heading south, the cheer is not likely as the reasons for the dive in prices is purely not due to the surplus in supply but to do with the concerns of the world economic growth.
Now, the perspectives could be different. One could say the markets are down or the markets are at an attractive valuation. Whatever is the logic, the reality is that all the current values of the investments are down or lower than earlier and in some cases lower than the invested amounts. So, what should an equity MF investor do now?
The most common mistake investors do is to lose patience and confidence during these times and stop the investments, especially the monthly contributions towards Systematic Investment Plans (SIP) which could backfire.
Yes, one could book profits but it has to be more scientific and rational. If one had a plan of certain percentage gains in mind, then probably partial exits in the MF portfolio is nothing wrong but complete exits at this juncture is not correct. And planned execution should start irrespective of the market nature i.e. bearish or bullish.
The last six months saw a re-rating of stocks which has resulted in huge discounts particularly with the mid and small cap space. Though there are green shoots in the earning bounce, it’s not yet completely materialised.
Investors with quality portfolio of MF needn’t worry with the corrections and should take advantage as entry points for the medium to long term horizon. In some spaces, current valuations in the mid and small cap is turning attractive and one could slowly build exposures in a staggered manner.
Purchasing or topping up the fund in dips would be a great option if one is following the market keenly. But, it has to be done judiciously because the cost of topping up should be lower than the earlier purchase.
For instance, when the initial investment was made at NAV of Rs 25 and if the dip in the market makes the NAV to reach Rs 22 then the averaging is done better. And if the NAV actually goes up to Rs 30 and comes back to Rs 27 then the averaging might not be at the best advantage. But, even in the latter example, if the investors’ timelines are longer then the situation could turn advantageous for the risk takers.
Understand that staggered investment approaches like Systematic Transfer Plans (STP) or SIP are the best methods of investing during volatile markets. They offer cost averaging and partially timing the market at convenience.
When there is a STP running on a weekly basis from a liquid fund to an equity fund and one could make a switch to top-up the investment. For example, if Rs 10K is being moved from a liquid fund to an equity MF on a weekly basis and a decent dip in the market provided an opportunity to invest then a switch could be executed to top the STP.
The amount of switch, however, could be decided depending upon the opportunity i.e. the fall and percentage of the corpus available in liquid fund. In case of a SIP investment, the wisest thing is to continue investing. So, stopping a SIP in these markets would certainly be a bad move. (The author is co-founder of “Wealocity”, a wealth management firm and could be reached at email@example.com)