U.S. Elections: What should retail equity mutual fund investors do?

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Updated: Nov 02, 2020 11:00 AM

There will be volatility in market post-2020. One can take advantage of such volatility by actively managing the quantum of investment.

U.S. Elections, equity mutual fund, investors, SIP, financial markets, asset allocationOne should continue with SIP’s as predicting market movement is not the idea of investment via mutual funds.

The US Presidential election is round the corner and the world is waiting for the outcome with bated breath. The contest between Donald Trump and Joe Biden is considered to be a close one and the election hangover is expected to stretch well into a few more weeks after the results. Predictions can go haywire as uncertainty remains high. But then, one place where the prediction of election results has a big role to play is the stock market. Over the past few weeks, the leading US stock market indices witnessed huge volatility. “Contrary to what most market gurus and economists would have you believe, the US President has little control over what the financial markets do. Trying to forecast whether a certain US President will cause a boom or bust in the stock market during their term is pure speculation,” says Rishad Manekia, Founder and MD, Kairos Capital Private Limited, a Mumbai-based financial planning firm.

The retail equity mutual fund investors who saw a major dip in their NAVs during the March 2020 meltdown are also a concerned lot. Equity values have almost rebounded to pre-covid levels but sentiments are not looking promising amidst US elections and economic outlook. Should Indian mutual fund investor worry? “The US is the world’s largest economy, and in the past, we have witnessed the impact of US election results on the markets across the world, including India. In the short-term, US presidential elections may create volatility in the global markets, including the Indian market. But these are short-term effects and an investor with a long-term perspective should see it as an opportunity to accumulate units, if there is a sharp fall in the stock markets,” says Col Sanjeev Govila (Retd), a SEBI Registered Investment Advisor (RIA), and CEO, Hum Fauji Initiatives, a financial planning firm which caters exclusively to armed forces officers and their families.

Even if MF investors give the US elections a pass, there may not be much to lose especially when they are meant for long term goals. “Considering the elections markets could be extremely volatile but at the same time money which is already invested via equity mutual funds should continue to hold their positions as elections overhang will be for a short span of time and investments made for long term will not be severely impacted due to which the SIP’s should also be continued. Investors with a cautious approach can opt to hedge their portfolio with the help of options which would reduce the risk for the amount invested,” says Nitin Shahi, Executive Director, Findoc Financial Services Group

More than trying to time the market, revisiting asset-allocation and one’s financial plan may help investors in these times. “If an investor tries to time the market, he will most likely hamper his returns because he will not be able to perfectly predict the market high or the market low and along the way will incur significant costs due to trading and taxes. Time in the market matters far more than timing the market and, therefore, investors should keep their financial goals in mind while investing and stick to an appropriate asset allocation with a mix of equities, fixed income and other assets,” says Rishad Manekia, Founder and MD, Kairos Capital Private Limited, a Mumbai-based financial planning firm.

Higher valuations

Not all investors could be comfortable to invest especially a lump sum in the current market levels. “This would not be the best time to invest lump-sum amounts in mutual funds as the market has rallied more than 50% in the last 6 months and Indian markets are trading at record P/E levels of 34.50. Moreover, market consolidation or a correction is due as per the current scenario. On the other hand, one should continue with SIP’s as predicting market movement is not the idea of investment via mutual funds,” says Shahi.

For those who still want to stay at the sidelines and wait for the right opportunity, there are ways to go about it. “In case a lumpsum amount has to be invested, one may invest it in a liquid fund and opt for a systematic transfer plan (STP) to enter the equity market. Hence, using a STP, we again make a bulk out into a SIP kind of investment while still earning the gains of a liquid fund,” says Col Govila (Retd).

Even if there is a fall in the market, the long term MF investors can utilise the opportunities thrown up by low levels. The concept of rupee cost averaging works best when the markets fall and go up over the long term. In fact, one may even opt to increase allocation during big market moves in either direction. “I suggest dynamic SIP allocations. When the market goes up reduce the quantum and when markets go down increase the same. There will be volatility in market post-2020. One can take advantage of such volatility by actively managing the quantum of investment,” says Vivek Bajaj, Co founder StockEdge.

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