By Deepak Jasani

The fear gauge in the Indian equity market has moved up significantly amid concerns about the impact of the coronavirus outbreak. The domestic stock market has seen a deep correction recently. The whole world is battling a health crisis with central banks and governments across the world redrawing their priorities to tackle the economic fallout from the virus.

The International Monetary Fund expects the world GDP to shrink by 3% in 2020 and the Indian economy is expected to grow by 1.9% for CY 2020.Some economists feel that the current crisis is even worse than the global financial crisis of 2008.

These are tough times for investors as the stock market has seen sharp correction of 37% in Nifty. However, some smart selective recovery/stability is witnessed in the last few sessions/weeks due to improved global sentiments. Corrections like this are the best time to accumulate quality stocks.

Review your portfolio
We have seen in the past that some businesses bounce back quickly after the shock. Investors should focus on quality companies; and should not shy away from booking losses in fundamentally weak companies. Companies with a strong balance sheet (cash, low debt), steady and robust business models, businesses with low competitive intensity and most important, good corporate governance will be able to weather the storm better than others which may take a long time to recover or have to shut shop. Revisiting and reviewing your portfolio is utmost importance in such times.

Likewise, mutual fund investors should at regular intervals undertake due diligence and review their schemes’ performance to weed out underperformers, rebalance their portfolio and adhere to their asset allocation strategy. Booking profits when equity valuations rise (upsetting the planned asset allocation pattern), will help entering again at lower levels. Rebalancing and strictly adhering to asset allocation should be practised once every six months.

A simple alternative would be to redeem equity units accumulated over two to four years which have yielded decent return of 12-15% per annum and parking the redeemed amount in shorter duration funds. Stopping the running systematic investment plan (SIP) and starting a new SIP, thereby booking profits, raising some cash that can be tactically deployed temporarily in debt till a lumpsum investment opportunity arrives in equity space will help in optimising investors’ returns from SIPs and avoid investor regret of seeing high returns on un-booked SIPs which crash suddenly in bad markets.

Fall in value
There is no way to know the trough of the market especially in such times. Considering the uncertainty of the situation, investors might have to experience some more pain in the coming weeks and when the second and third order effects of the pandemic are witnessed, assessed and more clarity on the extent of the spread of the virus is evident.

Existing investors in SIP schemes may be disappointed at first glance as the SIP returns may not look exciting. However, this is the result of a fall in stock values over the past few weeks and once these values bounce back, the returns will look more respectable. Investors who have being doing SIP for the last two years, three years, five years and in some cases even seven years have seen negative or single digit returns now.

However, investors should not judge the outcome of their SIP investments when markets have deeply corrected. The SIP returns (XIRR) are subject to end-point bias, wherein all the investments you have made during your SIP tenure is assumed to have redeemed at such dirty cheap low levels and thus the return picture would be gloomy. Taking investment action based on such returns would not be a wise decision.

Investors should be selective about their stock picks and/or MF schemes and invest in a staggered manner. Investing in high-quality companies/proven MF schemes always pays in the long term and these would be the first to recover. Aggressive investors can deploy 40% of their fresh funds at these levels and spread the remaining over 4-6 months. Investors should remember that volatility is part and parcel of equity investing. We have seen such deep corrections in the past and this may not be the last time. We have also seen markets touching new highs after such deep corrections.

The writer is head, HDFC securities Research