Mutual Fund Portfolio in red – A retail investor dilemma
There are a lot of retail investors who joined mutual funds bandwagon during the last two years looking at the euphoria around mutual fund investing, #MutualFundsSahiHai campaign, a slew of ads on various TV channels, newspapers, and social media as a whole. Retail investors inspire to achieve their medium to long-term financial goals by investing small amounts every month in mutual funds via SIP.
SIP as an investment methodology has gain greater traction beyond Tier I cities as investors slowly but surely are realizing that exposure to equity, especially from the early years itself is a must to achieve lofty medium to long-term financial goals. Inflation is eating into our savings stacked up in a bank account by every passing year. To add to that, medical and education inflation is making things only a lot more difficult. In such times, saving judiciously and investing consistently across various asset class is a must. Investing in mutual funds via SIP mode from the early years is one of the options investors have. Keeping investible surplus stacked up in FD’s, RD’s will only result in the big delta created between actual and required corpus.
Having said that, severe market correction from mid-September till October 31, 2018, as I write this article has left many retail investors jittery, especially first-timers. Fall, especially in small and mid caps, in barely two months has been quite severe leaving overall mutual fund portfolio in deep red from a retail investor standpoint. Some of the investors are again contemplating redemption and stopping of SIP’s and moving back again to FD’s and RD’s.
Majority of DIY investors have initiated investment in mutual funds when markets were at an all-time high. More importantly, irrespective of the risk profile, the majority of investments were made in small and mid-cap funds which have faced far more wrath that the Nifty or a Sensex have in this downturn. Investing primarily based on the last 1-year, 2-year return or looking at star ratings don’t always give a true picture as to which funds you should invest in. Here’s where most of the mutual fund investors get it wrong.
How much long-term an investor may be but a sudden big dip in markets, especially for those who have just started their equity investing journey can make them doubtful as regards the potential of equity to deliver good returns. All said and done, we as investors have to learn by each passing day, not get disheartened, move forward with a lot more vigor and purpose as our today’s investments will decide if we will retire with a comfortable corpus, will we be able to make provisions for our kids higher education and marriage, will we be able to take care of medical costs post-retirement to name a few. Being positive towards the equity market from the long-term wealth creation perspective itself is the first step towards creating wealth.
Here’s are few suggestions for retail investors who are grappling with deep red in their portfolio and are in dilemma as what to do next:
(1) Relax and stay put – First thing is not to get panic, not to stop your ongoing SIP’s and not to redeem investments. This is the most important thing. Stay put and continue your SIP’s as usual. Beware of friends or relatives who tend to paint a depressing picture of equities as an asset class during these market downturns. ‘Maine toh pehle hee bola tha…’, ‘I told you that share market ek Satta bazaar hain’ etc. Same individuals go into hiding when the market touches an all-time high and most of the times don’t have a single penny invested in equity instruments. During such volatile times, making sure you react reasonably to different arguments about markets outlook by separate individuals or write-ups, views etc. available on social media. Focus on your goals and why you have invested in equities in the first place. It’s more of a behavioral fight with self rather than getting nervous or stressed out due to the market fluctuations. SIP’s installments deducted during these market downturns will play a significant role in creating wealth for you in the long term. Stay Positive!
(2) Evaluate your risk profile and your financial goals (if you haven’t in the past) – These are the basics which most of us as investors tend to ignore. This has to be done as the first thing irrespective of the market movements. That’s why I am mentioning it here. When small caps and mid caps were rallying a few months back, it seemed there’s no end to it and this stupendous out-performance will last forever. Many retail investors were drawn into a false illusion that it’s such as an easy task to make money in equity markets until lightning stuck in September 2018. Exactly the same has happened with small and mid-cap funds investors in the last two months.
A few months back investing in the large-cap fund and even a multi-cap fund was seen as the height of stupidity. Methodologies relating to proper asset allocation, analyzing risk profile and then investing, maintaining the adequate emergency fund, first-time equity investor should initiate investments in balanced or a large-cap fund etc. have been carefully crafted with great consideration all these years and we should give due importance to them. Analyze which of your current investments map to which goals. Once you have done this activity and have identified possible gaps, document it and document it well in detail. Act and prepare a list of recommendations and corrective measures and implement it as soon as possible. Take help of an advisor, if required. Possible actions can be adding more large-cap and multi-cap funds in your portfolio, consolidating mid and small-cap funds portfolio, increasing debt allocation, increasing SIP’s in mid and small-cap funds etc. It is never too late to map investments to your goals based on your risk profile. This will provide you with more clarity as regards your financial goals planning.
(3) Rebalance your mutual fund portfolio (if required in line with point 2) – Post your analysis of goals against your investments, if the inference is that current investments are in good quality funds and maps perfectly to your risk profile and financial goal’s time horizon, stay put. Volatility will help your portfolio in the long run to generate better returns. If you are a first-time investor and have 2-3 mid-cap funds and 2-3 small cap funds only, you need to reevaluate your portfolio allocation. A large-cap fund, couple of multi-cap funds, a mid-cap fund and a small-cap fund (if suits your risk profile) can be an ideal combination. Bottom line is that have a well-diversified portfolio. You can have more towards equity allocation if you are an aggressive investor but you can’t have a portfolio of only small and mid-cap funds.
Don’t over diversify but commit more to your core portfolio holdings. Don’t compare returns of a large-cap fund with a small cap fund. This way you will never be able to invest in large-cap funds in the first place. Look for risk-adjusted returns and not just returns. This rebalancing of the portfolio has to be done as soon as possible and has nothing to do with what kind of market we are in. There’s no point investing in risky funds if it doesn’t suit your risk profile. However, you also need to keep your goals in mind. So a balance is required. Small and mid-cap funds are great for goals which are a long time away from such as retirement, at least 10-15 years away. Multi-cap funds, on the other hand, have the capability to invest in more broader investment universe based on the future market outlook. Try to invest in top 5-6 AMC’s which have a credible investment history and can be relied upon for the long term.
(4) Don’t stop your mid and small-cap funds blindly – Continue with your investments in small and mid-cap funds. With small and mid-cap funds facing the brunt of a market correction, there’s a lot of pessimism around these fund categories. But same funds have outperformed mainstream indices in the last few years handsomely. Such a correction is healthy for your overall portfolio and keeps investing if you can digest the volatility associated with them. However do restrict a number of funds in these categories and stick to ones who have shown credible performance, both on upside and downside. For instance, if you have 4 small-cap funds, consolidate them to 2 funds. A good fund outperforms not only on the upside but also show resilience on the way down. Make sure you not only look at short-term returns but performance over an extended period of time across different market cycles.
(5) Keep enough liquidity with yourself – Don’t be in a hurry to invest at lower levels. Make sure you do have enough liquidity up your sleeve so that there’s not a slightest of a chance for you to redeem equity investments during market downturns. Keep extra liquidity cushion with you in case market correction prolongs for an extended period. This will lower the possibility for you to redeem investments when markets are down. Keep adequate emergency fund with you.
(6) Follow Systematic Transfer Plan route and avoid lumpsum investments – If you are one of those intelligent investors who want to commit an additional amount to your mutual fund investments now, follow STP route and avoid lump sum investments. Put money in a liquid fund and do an STP to your existing SIP fund. Don’t be in a hurry to invest in markets. The index will not touch lifetime highs in a day. Staggering of investments is the way to go. Don’t be adventurous but avoid investing in thematic or sectoral funds if you are not well versed with the sector fundamentals.
(7) Increase your SIP amount if possible – In case you were contemplating increasing your SIP amount recently, now is the time. Do that immediately without fail. Such proactive steps in your investment journey will reward you with leaps and bounds in years to come. Increase you SIP as per your goals and your investible surplus available. This downturn is an opportunity, make most of it. Even is amount is minimal, so it. Don’t shy away.
(8) Ride the volatility – Current volatility is great for your equity investments in the long run. Don’t be disheartened by an unrealized loss. Quality of the funds has to be impeccable and the portfolio has to be diversified. If you have taken care of these factors, you have no reason to worry. Keep investing. Choose only quality funds with a great track record. Keep investment strategy simple and don’t see NAV daily. Remember you are here for the long haul – demonetization came and went, Brexit came and went – above all 2008 came and went. This correction is nothing in front of that crises a decade back.
Before we end, as an investor, your investment strategy should not change, irrespective of it being a bull or bear market. If you are an aggressive investor and have crafted your portfolio accordingly, you must be aware of the volatility associated with it. So the script is getting played out. There’s a lot of noise once market corrects and experts start giving absurd targets on the downside. No one knows what the bottom is. So timing the market is a waste of time. Ignore the noise but make sure your mutual fund portfolio should contain only quality funds with good performance track record and has the capability to limit the downside as well. Hold on to your nerve and don’t panic. This is just a phase. Make sure you make suitable use of such testing times via STP mode or increasing your SIP. Such a proactive step will prop up your investments in the long run. There’s nothing more you need to do. Don’t take steps which are not warranted. Do remember quality will rule ultimately in mutual funds, just like in direct equity. Don’t buy or sell funds based on market conditions but have a well-diversified portfolio at the first place to avoid any rejig time to time which will only lead to more confusion than clarity and destroys precious compounding years. Keep your investment strategy simple, consistent and execute it effectively.
Stay invested, Stay positive!
Disclaimer: The write-up is for information purpose only and is not a recommendation of any sort to the readers. Mutual funds are subject to market risks. Please consult your financial advisor before taking any financial decisions. The author is investing in mutual funds via SIP mode.