Equity Mutual Funds: What to do with SIP, lump sum investments now?

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Updated: March 31, 2020 6:12 PM

Historical data has shown that investments made in challenging times have been quite rewarding for investors over the medium to long term.

 Warren Buffet, investors, Be fearful when others are greedy and greedy when others are fearful, SIP, lump sum investments, stock market crash, equity mutual fundsA look at how equities perform during the recessionary period and is it the right time to invest lump sum now?

MF SIP investments: The jobs are at stake and even the business activity is seemingly looking to come down big time. The Coronavirus crisis and its impact on economic activity is largely expected to continue for months ahead and the stock markets, which are often considered to be a mirror of the economy ( by some investors in certain situations), are already down by almost 30 per cent if not less. The real picture of a recession may still be some months away even while the government and the RBI are doing their bit to keep the economic momentum from falling further from current levels.

Retail mutual fund investors who have been investing regularly in the equities to meet their long term goals are a worried lot. Will there be a recession, how will equities perform during a recession, what to do with their investments now and when will be the right time to take the opportunity of low share prices?

To seek answers to some of these common investor queries, Sampath Reddy, Chief Investment Officer, Bajaj Allianz Life Insurance Company in an email interview with FE Online, presents a 360-degree view as to what investors may do now.

US and Europe seem to be going into recession. Is it true for India as well? How equity as an asset class performs in a recessionary period when economic activity is low?

The Coronavirus pandemic is a medical issue which is resulting in precautionary lockdown in many regions across the world. Shutdowns result in a slowdown in normal economic activity and if it prolongs for an elongated period of time, then a global recession cannot be ruled out.

In India too we are likely to see a slowdown in growth this year (especially in the near term); albeit the magnitude of the slowdown will depend on how the outbreak pans out in India, and how long the lock-down in various states lasts (as that will hamper economic activity). So, it’s still a developing situation, and clarity will emerge in a few months.

Equities (and riskier asset classes) usually underperform significantly (register a sharp correction) during recessions or sharp economic slowdowns, as indicated by historical data. Also, it should be noted that equity markets generally discount the future, so the markets have already started to price-in (via the current market correction) the slowdown, even though economic data will start to reflect it with a bit of a lag.

It is difficult to predict how much more the market will fall, or if we have bottomed out, as quite a bit of uncertainty still prevails. In past slowdowns, we have seen market drawdowns as large as 50-65 per cent.

Is it a good time for the retail investors to make large investments and capture the downside? What if the markets slide further down?

As we know, it is difficult to predict or time the market bottoms and tops accurately. We could still see some short-term volatility in markets as the Coronavirus cases globally and in India continue to escalate. However, with this sharp correction in markets market valuations have become quite attractive, as indicated by various valuation indicators like P/E ratio, P/B ratio, equity earnings yield vs bond yield, and market cap to GDP ratio.

This presents some buying opportunity for long term investors, and we suggest investors to gradually start deploying in equities (as per their risk profile). Historical data has shown that investments made in challenging times have been quite rewarding for investors over the medium to long term (as indicated by past market downturns like 2000 dotcom crash, 2008-09 global financial crisis, 2011 European debt crisis etc.).

For those who are sitting on a notional loss, is it better to exit the equity investments now?

Our suggestion is to keep calm and not panic. We know it is a difficult thing to do so in times of extreme volatility, but patience and discipline come into test over here—and can be quite rewarding for those who practice it during these volatile times. If someone is panicking and exiting now, they may be making their losses permanent (by booking them)—which is not advisable.

We want to highlight two famous and evergreen quotes by Warren Buffet here that may be helpful for investors:

“Be fearful when others are greedy and greedy when others are fearful.”

“We don’t have to be smarter than the rest. We have to be more disciplined than the rest.”

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