A falling market is the time to invest for the long term; it helps garner more MF units.
After keeping their nerve till September, mutual fund investors seem to be finally buckling under the pressure of falling markets. In the last couple of months, many have redeemed their schemes, and fresh money is not being invested.
Around 125,000 equity investors closed their folios in November alone, the second highest in the current financial year after July, when folios had shrunk 330,000. Since the beginning of the financial year, the industry has lost 770,000 folios. Even systematic investment plans (SIPs) are being cancelled. Data from the Bombay Stock Exchange (BSE) shows retail investors have sold equities worth Rs 4,000 crore till now in 2011.
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Yes, the consistent rise in debt returns has helped reallocate the portfolio. But getting out of equities in bad times is an equally bad move. "Each time the equity markets dip, an SIP instalment garners more units for the investor. This, in turn, lowers the average cost of purchase. If a fund suits the investor's risk appetite, now is the time to keep faith," says Vicky Mehta, senior research analyst, Morningstar India.
The Sensex has shed 22 per cent in 2011 and the Nifty 23 per cent. The mid-cap index was down 32 per cent and small-cap 41 per cent. Other sectors such as automobiles, public sector undertaking and information technology were down 19.31 and 15 per cent, respectively. Fast moving consumers good sector was the only gainer, up 11 per cent.
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Nilesh Shah, president, corporate banking, Axis Bank, told Business Standard, "It is difficult to predict how the markets will pan out in the short term, as there are too many variables that impact the movement." Yet, do not hit the panic button. Lower levels are an opportunity to enter the market in a staggered manner or stay put than exit at a loss.
"The Nifty, at 13 times one-year forward earning or 2.6 times trailing price-to-book, is attractively valued. It is not cheap as it was in the second half of 2008. So, there is a possibility for it to go down before moving up," added Shah.
There are stocks that have given positive returns in the bear market. Bajaj Auto is up 4.5 per cent, though all the other automobile stocks in Business Standard's top 200 companies list reported a decline of up to 34 per cent this year. Similar is the story with telecommunication, pharmaceuticals, FMCG, banking and so on. Gujarat Flurochemicals has gained the most in 2011 (83 per cent). TTK Prestige went up 52.21 per cent.
Dinesh Shah, CMD of Angel Broking, in an interview told Business Standard, "At these valuations, it makes sense for long-term investors to start accumulating quality blue chips." If you have idle cash, invest it in a staggered manner over a long period like SIP. You can reap the benefits of cost averaging. Look at select buys. You can spot these by seeing how much these are undervalued, the cash in the balance sheets and their finances.
Remember to have a long-term time horizon. Pankaj Pandey, head, research, ICICI Direct, advises being flexible with the investment horizon. "Instead of having a water-tight time period, be more flexible, as the markets will be driven by various events."
For those looking to start, index funds is the way to go. These are also recommended for those investing in the stock market and, yet, not willing to run excessive risks. Index funds are supposed to mirror the underlying indices — Sensex, Nifty, etc. However, for those looking at a horizon of five to 10 years, equity-diversified funds (one-year return of minus 20.08 per cent) are recommended, as uncertainty is averaged in the long run.