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Prime Up Your Fund Portfolio

With equities choppy, stay with debt funds in the short-run, continue SIPs, and avoid lump-sum equity investments till the clouds clear

In the past one year mutual funds have expanded and blossomed — and how! That’s why Indian investors have, in the past year, been socking away more in this mode of investment than ever before. Latest figures show more than 9.2 million active SIPs, on average investment of around Rs 2,900 per portfolio. The number of equity folios has crossed 4.37 crore, up 13 per cent over last year, as more and more investors turn to mutual funds for their investment needs.

Yet, everything is not as rosy as expected. The past six months have been anything but smooth for mutual funds. Despite the steady growth in assets under management of mutual funds, many categories of mutual funds have turned laggards. Their returns have dragged — some even turning negative this past year.
A large category of mutual funds is the large-cap diversified-equity fund. Here, returns have dipped 12.29 per cent on average in the past year, according to data from Value Research. Returns of mid-cap funds have dipped to -4.9 per cent, while infrastructure and banking funds are down by 12 and 20 per cent, respectively.

Equity-oriented asset allocation funds, which usually sport a healthy mix of debt and equity in their portfolios, also lost around 2 per cent in the past year, despite the steadiness of the debt portion in their portfolios.

Hybrid funds have turned in quite a decent performance, thanks to the steadier debt market, which did reasonably well last year due to the interest-rate cuts. Debt funds have done rather well, with short-term debt funds returning 7.58 per cent, and medium- and long-term debt funds 3.61 per cent.
Mutual fund investors are trying to dig in their heels in this volatile market, but for most equity-fund investors the returns have turned worse in the last six months. Returns in large- and mid-cap equity funds have turned negative to -6.24 per cent and -5.59 per cent, respectively. The last month has been particularly nervy for investors in small- and mid-cap funds, which lost 10.04 per cent and 8.07 per cent, respectively. At a time like this, should a mutual-fund investor continue to invest in the markets?

Experts point out, that while there is reason to worry in the short run, investors should first perform a risk-assessment of their portfolios and then take a call on the next sensible course of action. They should revisit their risk appetite every month, particularly with equity funds.

Each investor should make his own risk assessment. Says Sanjay Sinha, CEO, Citrus Advisors: “There is no such thing as one size fits all. If you are a conservative investor, and would like to have a conservative return, it would make sense for you to stay away from equity markets.”

A basic analysis of risk for each individual should have two components — the risk of a drawdown (or loss in portfolio returns) and the optimum allocation level to equity or debt. One should first set a drawdown limit or the loss one can take on one’s investments in risk-assets, which for example, may be set at 20 per cent. Second, investors should settle for a limit on allocation to equity. In this case, let’s say it’s 75 per cent.

If an investor has already placed around 50 per cent of portfolio in equity, and if there is a loss or drawdown of 10 per cent in a portfolio, the overall portfolio would lose only 5 per cent. In that case, the investor can still increase allocation to equity as he/ she still has some way to go on an equity investment limit of 75 per cent.

Says Sinha: “If you are on the other end of the spectrum, where the risk-bearing capacity is high, it makes sense for you to utilise calendar year 2016 to top up your equity assets to the extent your risk appetite permits. There is no perfect bottom after all.”

However, investors have to give themselves and the market sufficient time when investing in equity funds, particularly large- and mid-cap funds. Says market expert Ajay Bagga: “If one has a time limit of around three years, one can probably continue being invested in equity funds. Otherwise, if you are thinking of a year or less, it’s probably a good time to move out.”

Equity funds are likely to see more volatility as the stimuli at global and domestic levels have not turned out to be strong enough, say experts. The various kinds of stimuli have failed to raise hopes as expected, with the result that sentiment has not yet turned sanguine as much as hoped. “The US is in the seventh year of a bull market, a long and tiring run, and the Indian markets have no major stimulus on the fiscal and monetary front. Besides, you are likely to be disappointed by the budget and there’s the risk of markets then sliding further,” says Bagga.

Bagga also reckons that if one is now hoping to invest large sums in the market, it’s better to hold back from investing in the immediate future; at least, till the Budget provisions and some of the clouds on the international and domestic front are clearer. “There is no bottom-fishing right now; the bottom is still murky — and far away,” says Bagga. In other words, investors should take it easy in equity funds right now, particularly, if their investment horizons are not far enough.

One of the keys to good investing is to snag equity assets on the cheap. However, equities as an asset class are not yet inexpensive, according to experts. The markets have slipped nearly 20 per cent from their high levels, but that has not yet made equity an attractive proposition. Says Bagga: “Sure, the markets have corrected, but they have corrected from frothy levels to fair levels, not to inexpensive or low levels. Given the global situation and the problems that have dogged economies, we are probably heading to a loss year in 2016.”

Existing investors should continue with their SIPs, however. Systematic investment plans are tailored to do well when the markets are on their downward slanting journey as such funds help average down the buying cost in equity. Bagga says that investors should continue with equity SIPs. “It’s a natural way of averaging out, and investors have an affordability factor in SIPs. With such funds, you are putting small sums of money for good use over very long periods.”

Investors in debt funds should continue their investments say experts. Debt funds have been a true beacon of stability in choppy markets and have been a steadying factor for mutual-fund investors. The good thing about them is that when interest rates are cut or reduced, returns are better here. If the yields rise, however, returns tend to fall.

In the months ahead, investment experts point out, that given the government’s stance on fiscal consolidation (of holding the fiscal deficit at 3.9 per cent for FY 16 and 3.5 per cent for FY 17), there is the strong likelihood of the Reserve Bank of India cutting rates in the coming months, post Budget. So investors in debt funds would do good to stay invested for the short term.

Bagga also says that investors should not make the switch from debt to equity funds. That is, unless more clarity emerges in domestic and global markets since the global risk-appetite has come off considerably in the past few months. Nevertheless, investors should watch for asset-quality levels in debt funds. “There were some nasty surprises last year. Stick with top funds, and watch portfolios carefully,” cautions Bagga.

The upshot of following a conservative strategy and shying away from making large investments is, if the market dips, investors would avoid seeing crimson portfolios. The downside is, if this market reverses, mutual-fund investors would miss out on opportunities for some large returns when they buy on the dips.
Fund investors should also watch for levels of caution in the market. “When markets do turn around,” says Bagga, “you will never have the confidence to get in because you won’t know whether this is the bottom and that’s where you miss a lot of returns.”

Another fund class that is drawing much attention of investors is balanced funds or dynamic asset-allocation funds. As such funds invest in both debt and equity, volatility in them is far lower than, say, pure equity or mid-cap funds. The past one year has seen flat performances of these funds.

However, some of them increase the allocation to equities when the markets slip further, ensuring that investors can allocate more to equities when prices are falling. These funds suit investors who do not want to decide on their own about allocating to equity. These funds also help navigate the turbulent weather in this market.

But volatility is going to keep some equity and mid-cap investors on their toes. For now, a good strategy is to watch market movements and not get too edgy about short-term performances. Look at funds for the long haul. (Most fund investors don’t even hold out for the short term.)
While it’s not a great time to get into mid-cap or large-cap funds, keep an eye out for buying opportunities in the next two-three months; otherwise, its wait for now till the stormy clouds drift pass.

Large-cap fund investors who can wait a while should continue to dig their heels in this market and stay put, while scouting for buying opportunities later in the year. Says Bagga: “When this economy turns, large caps will turn first.”