Mutual Funds: To stay invested or exit? Check these four points first

Published: August 13, 2019 3:35:42 AM

The BSE Sensex is trading lower compared to the 1-year-ago and 3-months-ago levels, while it is flat compared to its level 6 months ago. In the past one year, small cap and mid cap funds have offered negative returns of almost -16% and -12%, respectively.

Mutual Funds, Indian stock markets, stock market, equity portfolios, BSE Sensex, moneyForeign investors have already withdrawn over billion from the Indian markets in July this year.

By Hemanth Gorur

With the Indian stock markets tumbling in recent months, many equity portfolios are in the red and investors are understandably concerned. Nifty is already well below the 11,000 mark, and may well be close to the 9,000 mark effectively if one excludes the top 10 performing scrips. The BSE Sensex is trading lower compared to the 1-year-ago and 3-months-ago levels, while it is flat compared to its level 6 months ago. In the past one year, small cap and mid cap funds have offered negative returns of almost -16% and -12%, respectively.

However, this need not be reason to panic. What’s unfolding in the stock markets currently could be a market “correction”, so do not try to time the market or take exit decisions without understanding why markets are behaving the way they are.

Why market returns are turning negative

What is triggering the uncertainty amongst mutual fund investors is the news of a sluggish future. Foreign investors have already withdrawn over $2 billion from the Indian markets in July this year. International rating agency Moody’s has also projected sluggish figures, predicting slower economic growth in the next 12-18 months.

Other reasons impacting the bearish outlook include slowdown in loan sanctions from non-banking financial companies and dipping consumer expenditure. NBFCs loans, for example, have witnessed a decline of 31% for the quarter ended March 2019 compared to the same period last year. All this may mean that stock market recovery, though inevitable, may not be steep.

From a sectoral perspective, the automobile sector and allied industries of OEM suppliers and parts manufacturers have been impacted. The NBFC crisis leading to a dent in consumer purchasing patterns and the shift in emission control standards to be effective from April 2020 have added up to put a stranglehold on the auto sector at large. Sales slowdown has also impacted banking sector, with banks witnessing a fall in disbursed retail loans to their lowest level in five years. Many other sectors including MSMEs and real estate are facing the brunt of an overall economic slowdown.

Stay invested or exit?

With falling markets, stock portfolios slipping into the red, and predictions of a slow revival, it may be tempting for mutual fund investors to dive into exit mode. Consider the following before deciding.

Know your investment horizon

If you are a short term investor needing liquidity, this can be a good opportunity to exit the markets on the next short term high. However, ensure that you are exiting with positive returns. Those having a medium to long-term prospective can stay invested. “Buy low, sell high” is time-tested stock investing principle that you can adopt in such a case.

Do not stop your SIPs

In falling market scenarios, your SIP can allow you to achieve higher NAV accumulation. Assuming your investment horizon is for the long term, this is a good reason to continue with SIP based mutual fund investments when the markets are correcting.

Have a measured small cap and mid cap allocation

Small-caps and mid-caps are far more volatile than large caps but this alone must not be a reason to avoid mid-caps all together. Market corrections offer an upside for small and mid cap buyers as valuations have turned favourable, as long as there is a well-thought exit strategy and the flipside of buying these type of stocks is understood.

Move your money into debt

An alternative to exiting the markets completely is to move your equity investments into debt, since debt markets work on different principles and would not be affected directly by the current bearish outlook in equity markets. Before taking a decision, assess the market and your options, consult experts, and then choose the option specific to your investment portfolio and objectives.

(The writer is co-founder, Hermoneytalks.com. Views are personal.)

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