Mutual Fund Investing: Three Strategies for Mutual Fund Investors in a Volatile Market



What does Omicron’s spread mean for mutual fund investors? In one line, it means: “No more short-term volatility in your portfolio of equity mutual funds”.

This time around, there is no room for central banks to support the economy with stimulus measures such as rate cuts. Governments will also be unwilling to stretch their finances by providing fiscal stimulus. Even if the probability of a worst-case scenario in terms of the spread of the Omicron virus is less, central and state governments would not want to take any risks, having burned their fingers earlier. Therefore, just as a precautionary measure, they would not relax large-scale closures, travel bans and restrictions that may impact economic activities. Whether the spread of Covid is severe, moderate or transient, financial markets do not like such uncertainty and it will lead to short term volatility in financial markets.

If you juxtapose the current scenario with March 2020, defensive sectors like IT and Pharmaceuticals will do well, which will be reflected in the performance of these thematic funds. Funds geared towards high-quality, large-cap securities may be better off as there may be a relative flight to safety.

Should investors be nervous or reduce their position in equity funds?

Investors should understand that equity investments are volatile and should maintain a long term horizon when it comes to investing in equities as an asset class. We normally recommend that at some point only the money that you do not need for at least the next 5 years can be part of your long term equity wealth building portfolio so that you do not get disturbed. by such a short term. market fluctuations. These investors must continue to hold their investments. With massive fiscal and monetary economic stimulus, we are heading for a strong economic recovery followed by a phase of high growth as evidenced by several high frequency economic indicators. So, barring short-term volatility, the long-term outlook looks bright.

In addition, markets have already corrected and valuations have returned to more reasonable levels. We are still around 4% below the all-time high after the correction. In fact, then, this is a good opportunity for investors who were waiting on the sidelines to take advantage of this volatility and build or supplement their long-term equity portfolio at lower levels.

The following mutual fund strategies will perform well in a volatile market:

1) Systematic investment plan (SIP): Due to the average cost in Rupees, in a SIP you end up buying more units when the markets are down and less units when the markets are up. So, such volatile times help your SIP investments lower your average cost of ownership and are an ideal way to invest in such an uncertain scenario where it is difficult to predict short term highs, lows and directions in the market.

2) Systematic transfer plans: People with lump sum cash to invest can create a synthetic SIP by making lump sum investments in liquid funds and setting up a weekly / bimonthly or monthly transfer plan to equity funds. The idea is to invest in equity funds in a staggered fashion and allow the average cost in rupees to work to your advantage.

3) Asset Allocators and Equilibrium Advantage Funds: These funds invest in a combination of assets like stocks, debt and, in some cases, gold. If the stock markets go down, the proportion of stocks held in the fund’s portfolio will decrease, and then when the fund manager rebalances his portfolio, he will partly switch from debt to stocks, thereby buying equity investments at lower prices. Basically, “Buy low, sell high” is automatically built into such investments, which works well in volatile markets.

(The author, Suvajit Ray, is Head of Products and Distribution, IIFL Securities. His views are his own)



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