Sensex and Nifty crack 4% each: What should mutual fund investors' strategy be?
As Indian benchmark indices crash 4 percent driven by escalating global trade tensions and renewed fears of a US recession, mutual fund (MF) investors must exercise caution and refrain from making substantial investments, both on the buy and sell sides, experts say.
On April 7, Indian stock markets tumbled sharply, mirroring a global sell-off sparked by rising trade tensions and growing fears of a recession.
According to experts, US President Donald Trump’s announcement of sweeping tariffs raised concerns of a global trade war, hitting investor sentiment worldwide. India, however, they believe, is well-positioned among emerging markets due to the relatively lower tariffs imposed by the US.
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“The Indian economy is primarily domestic driven, with exports constituting a small portion of GDP, making it less susceptible to global trade disruptions. Recent concerns about the US growth have triggered capital outflows from the US and a depreciating dollar, making India a more attractive destination for inflows,” Axis Mutual Fund said in a note.
The 15-25 percent correction in frontline indices over the past six months has also made valuations more reasonable. Another factor that works in India’s favour is the lower level of crude oil prices that prevail.
However, given the current environment, Indian equities are expected to remain volatile in the near future.
Kunal Valia, founder, StatLane, believes that the current combination of extremely negative sentiments with correcting equity prices could offer more reasonable entry points for long-term investors compared to six months ago.
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“During this accumulation phase, investors may focus on stocks across various sectors, with an emphasis on those driven by domestic demand. However, we believe that a prolonged correction in externally dependent sectors presents attractive opportunities, particularly in the IT and chemicals sectors,” said Valia.
SIPs vs lump-sum
With the correction in the market, valuations of different segments have moderated sharply. Does this warrant a lump-sum investment or a staggered strategy in the form of SIPs or systematic investment plans?
Given the current volatility, financial experts advise MF investors to exercise caution. As valuations rise further, sudden down moves could also become more frequent.
At the same time, note that equity markets’ returns are never linear.
Also, MF strategies differ significantly from direct stock investing. Unlike stock trading, these investors typically do not focus on booking quick profits, halting new investments, or making heavy market-timing decisions based on short-term fluctuations.
Long-term investors with well-diversified portfolios who consistently invest through SIPs should remain invested to achieve their financial goals.
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SIPs help mitigate the impact of market fluctuations through rupee cost averaging, ensuring disciplined and consistent investing. At the same time, retaining some liquidity allows investors to capitalise on potential market corrections.
Your goals, your investment horizon
If your portfolio has seen a fair bit of gains over the past three or four years but you are still not able to digest the current volatility, it’s better to reduce risk in your portfolio.
Portfolio allocation should always be aligned with an individual’s risk-reward profile, goals and investment horizon, regardless of the current market sentiment.
While the broader mood suggests moderation and tempered return expectations, it’s essential not to make impulsive shifts like reducing equity exposure or increasing fixed-income holdings based solely on market conditions.
The focus should remain on the personal risk appetite. Given the recent market correction, this could be an opportunity to allocate a fair share towards equities. However, the core strategy must still reflect the investor’s long-term goals and risk tolerance rather than short-term market movements.
Funds to pick
The choice of fund categories should always be determined by the portfolio you design based on your risk appetite and investment horizon.
If your portfolio requires exposure to hybrid funds, options like balanced advantage funds or multi-asset funds can be suitable.
Experts believe that the market may move away from low-growth, low-quality segments towards companies with strong fundamentals and sustainable growth prospects.
Also, since sectoral funds tend to perform in cycles, a diversified flexi-cap fund may be a good choice, as it offers fund managers the flexibility to adapt to changing conditions across market caps.
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“For mutual fund investors invested in sector-specific, factor-based or thematic mutual funds, it’s advisable to exit or reduce your allocation in these areas. When the market recovers, it may take some time for the performance of these sectors to improve. Instead, consider reallocating your funds into flexi-cap funds, particularly those focused on large-cap stocks. If you have a significant investment in mid-cap and small-cap funds, it’s also time to reduce those holdings,” said Anand K. Rathi, co-founder of MIRA Money.
Further, by distributing investments across various asset classes, such as stocks, bonds, real estate, precious metals and cash, the poor performance of one investment can be offset by another investment.
An investor’s approach to market corrections should align with his or her financial goals, risk tolerance and investment time horizon. Recognising the long-term growth potential of equities is crucial. Before making any portfolio adjustments, it is advisable to consult your financial advisors or distributors to evaluate the market conditions and ensure that decisions are well-informed.