Equity Markets Volatile: How Should Mutual Fund Investors Invest Today?

On August 6, the Indian equity markets saw a notable rebound, following a global market meltdown the previous day. This drop was triggered by concerns over a potential US recession and the unwinding of the yen carry trade, spurred by an interest rate hike from the Bank of Japan. Both the Sensex and the Nifty had plummeted nearly three percent but were trading positively by around 11 am, though they had trimmed some early gains.

Dhiraj Relli, Managing Director and CEO of HDFC Securities, commented on the situation, stating that the sharp corrections in global markets were due to disappointing job figures in the US, which heightened fears of a recession. This was compounded by worries about a reverse yen carry trade following Japan's interest rate hike. Additionally, a shift away from the technology stocks that had driven this year’s rally is underway, with investors and analysts debating if the US Federal Reserve will need to hasten policy easing to support growth.

Given the Indian market's partial recovery on the morning of August 6, investors might wonder about their strategy going forward.

Stay the Course

Financial experts recommend that mutual fund investors remain cautious amid ongoing volatility and avoid making significant investment moves, whether buying or selling.

Siddharth Alok, Assistant Vice President-Investments at Multi Ark Wealth-Epsilon Money Group, emphasized that as valuations rise, sudden market drops may become more common. He noted that returns in equity markets are never linear. Despite the negative news from Japan, its direct impact on Indian markets is limited. While global markets have dropped by 10-20 percent, Indian markets have only declined about 5 percent. Alok advised investors to monitor their overall asset allocation and consider buying during these dips if their investment horizon exceeds three years.

Stick with SIPs

Mutual fund strategies typically differ from direct stock investing, focusing on long-term investments rather than short-term market movements. Investors with well-diversified portfolios and systematic investment plans (SIPs) should continue their investment plans.

The potential US recession might negatively impact market sentiment and cause global market corrections. However, markets in economies with stronger domestic fundamentals, like India, could recover faster. Sandeep Bagola, CEO of TRUST Mutual Fund, suggested that investors with a long-term perspective should consider systematic investments during market corrections, especially in areas where valuations are not overstretched. He viewed the current situation as a medium-term correction, presenting long-term investment opportunities for patient investors. He advised maintaining low short-term return expectations and focusing on systematic medium-term investments to benefit from long-term growth.

Avoid Risky Pockets

According to Wisdom Research, the market is likely to shift away from low-growth, low-quality segments toward companies with strong fundamentals and sustainable growth. Capitalmind Financial Services indicated a higher probability of a price correction in the small-cap index if earnings do not improve.

The BSE small-cap 250 index has been rising since April 2023, following a 15-month stagnation. However, Capitalmind Financial Services noted that while the P/E multiple of the BSE small-cap 250 expanded by 63 percent over the past year, earnings per share remained flat at -3 percent. This suggests that the recent price increase is primarily due to P/E multiple expansion, raising the risk of a price correction if earnings don't catch up.

Diversify Risk

Bonds are generally less volatile than stocks, providing stability during market turbulence. Vishal Goenka, co-founder of IndiaBonds.com, stressed the importance of portfolio diversification to sustain long-term investment returns. He noted that, given the significant global market movements, it is prudent to invest in other low-volatility financial assets such as bonds, alongside equities.

Investors should align their response to market corrections with their financial goals, risk tolerance, and investment horizon. Understanding the long-term potential of equities and consulting with financial advisers can help assess the market situation and make informed portfolio adjustments.