Don't redeem your investments during times of crisis, advise experts

They say holding on to multi-cap and mid-caps will reap rich returns

Stock market indices may have recovered from its March-lows, but investors in pure equity funds don’t seem too enthused. The June data from the Association of Mutual Funds in India shows that flows into equity schemes have fallen to a four-year low of just Rs 249 crore. Even the systematic investment plan (SIP) book fell to a dismal Rs 196 crore.

There are many reasons for this weak show. The most important: Many investors are facing a fund crunch due to layoffs or salary cuts. So, they have either resorted to reducing or entirely stopping their investments. Also, industry players say that there is a set of investors who have exited their mutual fund schemes due to low returns in the recent past and are actively playing the market themselves.

Fund managers, on their part, aren’t too worried as of now. Says Sankaran Naren, chief investment officer, ICICI Prudential Asset Management Company: “We believe there would be a gradually reversal of this trend. The drop in equity assets is marginal and is largely on account of Coronavirus related developments.” And they have a good reason to be confident. Things still haven’t gone into the negative territory like it had during the financial sector meltdown, and Lehman crisis in 2009.

According to A Balasubramaniam, MD & CEO, Birla Sun Life, equity mutual funds had seen some redemption mainly from high networth individuals and institutional investors because the market bounced back in the last few months, giving an opportunity to exit with profits. The Nifty up 41.1 per cent since March 23 lows. Similarly the Nifty mid-cap and small-cap are up 36.8 per cent and 42 per cent, respectively.  

But despite the sharp rise, a large number of investors are worried about their investments in the stock market, given the uncertain economic outlook. The global economy is expected to shrink by five per cent, according to the International Monetary Fund. Even the growth rate of the Indian economy is expected to fall by 4.5 per cent. “All these point to the fact that though the stock market is rising, but it is mostly on hope that earnings can only improve from here on,” says a fund manager.    

What’s the way out: Investment experts believe that people may have had stop investments due to financial pressure, but they should press the ‘pause’ button and not the ‘exit’ button. Says Nilesh Shah, MD, Kotak Mutual Fund: “Unless we get medical solutions in the form of drugs or vaccine or we learn to live with the virus, normalcy can't be taken for granted. Investors must stick to their financial plan. Disciplined asset allocation is the best way to ride out volatility.” For direct investors, his advice is – avoid penny stocks.

 

Adds Naren: “Such development holds the potential to derail one’s focus on long-term investments. For those investors facing salary cuts, one can consider reducing SIP amount or using SIP pause feature available with most of the leading mutual fund companies.”

Agrees Balasubramanian: “If someone needs cash during the lockdown period, he can choose temporary pausing of the SIP for, say for two months and resume once again.” SIP is meant to meet ones long-term goal and purpose, hence continue investing, say experts.

Investors who have had to stop or reduce their SIPs need to be clear that once things improve, they would need to restart them with, and if their financial status improves, increase the amount to make up for the lost time.  

Strategies to follow: In such times, having a clear strategy is important. Says Balasubramanian: “Though economic recovery will take some time, diversified equity funds in the multi-cap and mid-cap need to nurtured and focus on asset allocation with relatively higher weight towards equity.

According to Naren: “It is wise to apply asset allocation rules when it comes to investing in equities. The other better option is to consider investing into asset allocation funds. Investor looking to invest for the long term can also consider schemes with value bias.” And more important, Naren stresses on investing in debt mutual funds.  “Anyone who misses investing into debt is missing a very important and stable asset class in a portfolio,” he adds. Shah’s mantra: Be overweight on gold, neutral weight on equity and debt and underweight on real estate.

 

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