With net inflows into equity funds, at `6,609 crore , hitting a four-month low in September, and the number of new systematic investment plans (SIPs) registered in the month standing at 8.5 lakh—the slowest addition in six months—individual investors are now either deferring or redeeming their investments due to market volatility. Losses from mid- and small-cap funds and low returns from even large-cap funds have dampened sentiments for fresh investments.
Given the slowdown in the economy and the volatility, mutual fund investors should review the performance of a scheme against the returns of the benchmark or category that the scheme belongs to, and over the duration that the scheme is for. They must realise that investing in mutual funds should ideally be for the long-term, and a review should not mean exit from the scheme or switching.
Investors must be aware of the market situation and take steps that are in line with their financial goals and risk-return profile. Experts say while reviews should happen at regular intervals, modifications in the portfolio should be done if the returns are falling over a period of time.
Keep asset allocation in order
As returns from all asset classes do not fall or rise concurrently, investors must ensure that the current asset allocation mix remains the same as was originally planned. An improper asset allocation is the biggest impediment to wealth creation. Proper asset allocation would help an investor to take both tactical and strategic calls in the investment portfolio. Investors must realise that if they are investing in equity, the investment horizon should be 5-10 years. For an investment target spanning anything less than this period, the preferred choice would be fixed instruments with liquidity.
Investors in sectoral or thematic funds should be careful as they are exposed to unsystematic risk. Investors must assess the regulatory changes pertaining to the sector, changes in domestic and global economic conditions. If thematic funds are part of the asset allocation, then one must review their performance. Also, if any particular segment is trading at high valuations, then it is an indicator of forming of a bubble in the sector.
Analysts say, if market volatility is making an investor anxious, then he should reduce the equity allocation in favour of fixed income. The profits booked in equities should be deployed in fixed income. When the equity markets show a meaningful correction, then one can increase allocation to equity with a long-term view.
Ideally, investors must look at price-to-earnings ratio of a sector or segment and compare it with the historical average to assess if it is trading at rich valuations. Absolute returns of the scheme, over various short and long-term periods, will give an indication of how the scheme has performed during various market cycles. After analysing, if the investor finds that the absolute returns are consistently below par, then she should exit such funds and look at fresh investments that could meet financial goals.
Investors must compare the category returns like mid, small and large-cap to understand if the under-performance is in the entire category or just the scheme alone. If the scheme has consistently underperformed over a longer period of time, then one should exit and move to a better performing scheme. If the category as a whole has under-performed, then one should move to a category that has given higher returns in the long-run.
Index funds: A good bet
Index funds are ideal for the risk-averse mutual fund investor who want reasonably predictable returns. These funds invest in stock market indices in the same shares and in the exact same proportion and are passively managed with fund managers’ intervention being very limited. If an index fund is benchmarked to the Nifty, the portfolio will constitute the same 50 stocks as the benchmark.
An investor can be assured of the returns in sync with the indices. So, when the index as a whole performs well, the value of the fund increases, too. Expense ratio of index funds are lower that other funds, which helps in getting higher returns in the long-run. The only difference in returns in the funds would be on account of tracking error. So, the lower the tracking error, the closer the returns are to the benchmark. Index funds set aside a certain percentage in cash to ensure that, in the event of redemption request from investors, there is sufficient liquidity.
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Source: Financial Express