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Scarred by Coronavirus pandemic? Here is what mutual fund investors should do now

The current COVID-19-induced correction also provides the perfect opportunity for those who’d like to consolidate and streamline their portfolios by removing poor performers or discarding tiny mutual fund holdings.

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Last Updated: Mar 27, 2020, 10.57 AM IST
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By Chokkalingam Palaniappan

Out of the 195 countries in the world, COVID-19 has spread to 190 countries. All of us are going through an unprecedented situation. So are stock markets across the world. As a result, we are seeing a huge erosion in the wealth of equity investors, irrespective of whether they’ve chosen to invest through mutual funds or direct equity. While direct equity investors take on high risk, mutual fund investors assume market-related risk. Equity mutual funds in India invest across sectors in alignment with our economy and hence investments in these funds are less risky than direct equity investments.

The broader indices such as NIFTY 50 and Sensex have come off hugely from their peak levels. Portfolio value of those investors’ who have entered in the last few years may have gone down substantially. This period will be a particularly testing time for new mutual fund investors who started investing in the last few years. For those who saw the 2008 market corrections, this will be yet another major crash in their lifetime.

Many new investors, particularly direct mode investors, panic during extraordinary periods such as the one we are currently facing. For those who are investing through a financial advisor/ distributor, at least there is someone who can be relied on. Although the distributor or the financial advisor may not be able to make up the losses directly, he/she will understand the nitty-gritties of the market and will accordingly devise a strategy for the current market situation – even if it is advising the client NOT to do anything.

What should investors do at this point of time? Majority of the Indians are participating in the equity market through SIP (Systematic Investment Plan) mode to the extent of more than Rs 8,000 crores every month. Due to the paper losses that they see in their portfolios currently, the reaction of many investors will be to stop investing through SIPs. That would be a grave mistake – don’t do that.

SIPs in equity funds are generally done for long-term goals such as retirement, kids’ welfare and wealth creation. Therefore, by design, SIPs are capable of withstanding all kinds of corrections in the market, even sharp corrections such as the one we are facing now. These corrections will only help you to average your costs. Hence, in order to make the best of the situation, continue with your SIPs and if possible increase your SIP amount.

In the past 34 years (since 1986) there have been six major bear markets (a fall of around 40% or more). The time taken from peak to trough is anywhere between four months and 27 months. Similarly, the time taken for recovery ranges from six to 32 months. If the time taken to reach the trough is quick, then the time taken for recovery was also pretty quick. At this juncture, we are not sure if the correction is over yet. However, the current correction has been steep and quick. Going by the past data, the recovery may also be quick if the major economies are able to contain the spread of COVID-19 quickly.

Hence, if you have any surplus that is not needed for the next 5 years, you may consider investing in pure large-cap funds in a staggered manner during every major dip in the markets. Alternatively, you may opt for STPs (Systematic Transfer Plans). Large cap funds will bounce back quickly as and when the markets start moving up. Moreover, the returns that have been generated in the past, subsequent to major corrections, have been very good.

The current COVID-19-induced correction also provides the perfect opportunity for those who’d like to consolidate and streamline their portfolios by removing poor performers or discarding tiny mutual fund holdings.

Keep an eye on your asset allocation as well – if the equity percentage in your portfolio has gone down, you may want to bring it back to the levels that you have set for yourself. Since many investors may have paper losses right now, it may be a good idea to see if the same can be booked and fresh purchases executed. This will prove fruitful for those who can set off their gains against losses. Consult your auditor before doing so.

Every time the market falls, a large number of people rush to pull out their long-term investments in anticipation of a further fall in their portfolio values. Do not fall prey to this “mob mentality”. Whatever goes down will also come up. Hence, if you are not in need of money, at least for the next couple of years, do not pull out your money from equity mutual funds. This is not the right time to redeem your units. Rather, as discussed before, add money to equity mutual funds if you have surplus.

This too shall pass. India and other nations will come out of this crisis sooner than later. We will become a stronger and better economy. Equity funds will also come back with a vengeance in the next two to three years. Keep faith in the markets and be patient. Equity is the only place where you can earn solid inflation-beating returns.
Remain safe with your family and make use of the lock-down in every manner possible.

(Chokkalingam Palaniappan is Director at Prakala Wealth Management)
(Disclaimer: The opinions expressed in this column are that of the writer. The facts and opinions expressed here do not reflect the views of www.economictimes.com.)

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