 "Index rejig and your stocks")
Many mutual fund categories are showing a negative average return over a one-year horizon (see table). For all the new investors who entered the equity markets in the bull run that began in the latter part of 2013, this would be their first brush with a downturn. It is important that they don't get scared and dump their equity holdings.
If you were advised properly at the time of investing, you would be investing only that money in equities which you will not need in the near term. Therefore, don't allow yourself to be perturbed by the downturn and keep your Systematic Investment Plans (SIPs) going. Arvind A Rao, of Arvind Rao Associates, in fact, suggests a bolder stance. "So long as the money being invested in equity funds will be needed only three-four years years later, we strongly believe that investors use the current downturn to add to their positions in equity funds," he says.
Each of your portfolios should ideally be targeted to a specific goal. Long-term portfolios, such as those for retirement or a child's education, should have as much as 70-80 per cent allocation to equities. Don't let the current bout of volatility scare you into changing your asset allocation. "If you change the allocation now, reducing it for equities, you will have difficulty in meeting your long-term financial goals," says Ankur Kapur, founder, Ankur Kapur Advisory.
A downturn is also a good time to rebalance your portfolio.
Review the performance of your funds. A downturn reveals how skillful your fund manager is at containing downside risk. "If the Nifty is down nine per cent over the past year and your fund is down 18 per cent, consider switching to one of the funds that have managed to contain the fall better," says Kapur.
But, generally, large-caps weather a market downturn better. Mid and small-caps tend to rise faster during a bull run but also fall harder in a bear phase. For a stable equity portfolio, it is advisable to have at least a 70-80 per cent allocation to large- and multi-cap funds and only the balance to mid- and small-cap funds. Hence, don't reduce your allocation to these categories, despite their recent underperformance.
International funds: While the Indian economy is expected to perform better than most others over the next few years, continue with your investments in international funds, to benefit from diversification beyond your home market. However, your allocation to these doesn't exceed 10-15 per cent of your equity portfolio.
Gold funds: If you already have an allocation to gold, don't sell it. And, don't add to your position, either. Commodity cycles tend to be long and a downturn can last up to 10 years or even more. "We don't see any positive triggers for gold for the next two years," says Rao. Buy gold only if you have a goal, such as a daughter's marriage, where you will need the yellow metal.
Sector funds: Sector funds are a high-risk bet which only knowledgeable investors, with a high risk appetite, should undertake. If you were ill-advised and got into these without understanding the risks, consider exiting even at a loss. Reinvest the money in diversified equity funds.
Banking funds have not performed for a while now, due to non-performing assets and issues related to provisioning for these. Yet, according to Rao, that cycle could be coming to an end and this sector might see a bull run.
He suggests risk takers might hold on to these funds if they have a horizon of five years or more.
As for infrastructure funds, he believes investors should take exposure to this sector only via diversified funds.
Pharma, a stalwart performer in the past, has also begun to underperform in the past three months, owing to the threat from the US drug regulator, and should be exited.
Finally, high volatility is part of equity investing. Tune out of the noise from the markets, continue with your SIPs, and keep your eyes fixed firmly on your long-term goals.
