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Corona Crash: Your Mutual Fund Questions Answered

This is a truly unprecedented scenario with no historical parallel, and investors are buzzing with questions. Here are a few of them, answered.

Photo Credit : PTI

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The dreaded Coronavirus has thrown every single asset class into a tizzy. Expectedly, equities have taken the lion’s share of the drubbing, but fixed income hasn’t been spared either. Even Gold, the quintessential safe haven, gave investors a scare last week when it tumbled nearly 10% from its peak. On Monday, the SENSEX saw its worst one day fall in history, instilling more fear and panic into the already beleaguered community of Mutual Fund investors. This is a truly unprecedented scenario with no historical parallel, and investors are buzzing with questions. Here are a few of them, answered.

Will the market fall further or has it bottomed out?

Sadly, that’s impossible to predict as we have an evolving, highly dynamic situation at hand. Day to day fluctuations will depend purely upon incoming news flow. Any good news could spark of a very sharp relief rally, while any deterioration in the situation with respect to the Pandemic could trigger further panic selling. Only time will tell whether this is the bottom or not. Trying to time the bottom will only sink you further into despair, and is therefore highly avoidable.

Should I redeem from my Equity MF’s right now?

The short answer to that would be no, absolutely not. That would be akin to bolting the door after the horse has fled. Many investors harbour the mistaken belief that they will be able to get out now and ‘jump back in’ when things get better. However, relief rallies can be sharp and trigger all sorts of mental biases that makes this an impossible endeavour. Yes, seeing your portfolio down 30% is very, very painful indeed – but crystallizing that notional loss and never recovering it would be a whole lot worse. As difficult as it sounds – just stay put, and don’t watch the market like it’s an India-Pakistan cricket match! It’s very important to wait out such phases, even for several quarters if required. Equity Markets will eventually recover, as they always do. At that stage, take a measured decision on your asset allocation, as this phase would have taught you a lot about your own risk tolerance. Recall how the NIFTY slipped 70% between 2008 and 2009, only to completely recoup the losses in about 18 months during the course of a massive, liquidity fuelled bull run.

Should I invest into Equity MF’s right now?

The answer to that question actually depends on your answer to another question – can you stomach intense volatility or not? Without a doubt, we are approaching bargain basement prices on many stocks across market capitalisations, but especially in the mid cap and small cap category. The current P/E of the NIFTY is down to 17.58, and the P/B to 2.22. If this isn’t a good time to invest, what is? Having said that, this may very well not be the bottom. Markets are seldom rational, but mean reversion is an inevitability. If you invest right now, be prepared to see your new investments get a whole lot worse in the short run (or not, if you’re lucky). Stagger your fresh investments as part lump sum and part weekly STP (Systematic Transfer Plan) to even out the risks a little bit. And then, fasten your seat belt and hold on for dear life!

Why have my debt fund NAV’s fallen of late?

Globally, uncertainty due to the coronavirus has thrown all financial markets into a tailspin, fixed income included. This is a black swan event of the most spectacular proportions, and is already being touted as the kind of thing one can expect once in maybe a hundred years. Yields on corporate bonds have risen sharply (read: bond prices have fallen) across maturities in the last two weeks as the coronavirus outbreak has led to risk aversion and investors dumping bonds. This, unfortunately, has led to a drop of 2-3% in debt fund NAV’s across the board. While these risks are mostly theoretical during benign times, they (very rarely) become realities during such pivotal events. However, the worst of these yield related NAV drops may well be behind us, and we could actually see some sort of recovery quite soon as the RBI steps in to secure the bond markets. Do not exit your debt funds in a hurry, or you’ll miss out on the potential upside.

Should I stop my SIP’s (Systematic Investment Plans) right now and start them later when things get better?

Seriously, what good sense is there in doing that? The very purpose of SIP’s is to avoid market timing so that rupee cost averaging can work its magic for you over long timeframes. By stopping your SIP’s now, you’re basically saying that it’s OK to buy equities when they are expensive but NOT OK to buy equities when they are cheap. That’s a sure shot way to lose money in Mutual Funds in the long run, and the perennial ‘behaviour gap’ between published returns and actual returns bears testimony to the fact that such follies are repeated over and over again by investors. This is, in fact, the best possible time to keep your SIP’s running – so don’t make the mistake of stopping them and thinking that you’ll be able to restart them later at a more opportune time. You won’t, and your portfolio will suffer.

What about the economic fallout of the Coronavirus? Will it not drag my fund NAV’s down further?

If there’s one formula you should keep in mind about equity markets, it’s that in the short run, “economy is not equal to markets”. Recall Benjamin Graham’s timeless parable of “Mr. Market”. According to Graham, the temperamental Mr. Market is a bipolar kind of fellow; When he’s overcome by boundless optimism or bottomless pessimism, he will quote you a price that "seems to you a little short of silly (either lower or higher than what is fair)." As an intelligent investor, you should not fall under Mr. Market's influence, but rather take advantage of his mercuriality. With the bellwether index having tanked 40%, what’s to say that the inevitable economic fallout has not at least been priced in – at least in part? There may well be a scenario in the future when markets remain stuck or even rally, while incoming data prints are not all too rosy. Yes, Mr. Market is a strange fellow indeed!


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