How to invest in mutual funds in 2012 amid a volatile equity markets
For long-term mutual fund investors, strategy for 2012 is simple. Invest in a
staggered manner for at least three-five years without bothering much
about volatility and immediate market sentiment.
This time last year, the country's equity indices had stretched their stay at the top after a sudden burst of energy in September-end. The Bombay Stock Exchange Sensex crossed the 21,000 level, 22 months after climbing such a peak for the first time.
Both the Sensex and the National Stock Exchange Nifty had trespassed into the over-valued zone and the debt crisis in Europe had started to unfold. Inflation was rising, the Reserve Bank of India (RBI) was raising rates and protests over corruption were getting louder. A sharp correction looked imminent.
2012: Cash or Cataclysm?
The mood this year is no less sombre. The European debt crisis is far from over. Back home, the government is yet to show serious commitment to policies that can support a seemingly tottering economy.
However, amid the dark clouds on the horizon is a silver lining or two. Equity markets offer value after falling 20% since January 2011 and inflation, it seems, is beating a retreat for now, prompting the RBI to signal a less aggressive policy.
Morgan Stanley said in its 2012 India outlook report that inflation was moderating, setting the stage for monetary easing. However, it said, volatility emerging from a weak developed world could hold back Indian equity markets. It predicted a 16% upside for the Sensex in 2012. "We expect the market to make steady upward progress in 2012, marked by volatility," it said.
"Valuations seem to be better compared with historical levels. In some cases, they are close to the lows of 2008. At present, we are trading around 13.5 times oneyear forward earnings compared to the long-term average of 15.5 times," says Kapil Mokashi, senior manager, advisory, equity and mutual fund, Sharekhan.
Are these signs positive enough for small investors to bet on stocks in 2012? If yes, what should be their strategy? How should they prepare for market shocks? We discuss how mutual fund investors should take market upheavals, should there be any, in their stride and get good returns over the next three-five years.
Fund Performance in 2011
Let's press the rewind button and see how equity mutual funds have fared in the past one year. The average oneyear return by diversified equity funds on 7 December 2011 was -16%, with the best performing fund giving a 28% return and the worst -38%. The Sensex fell 15.34% from 19,696 on 8 December 2010 to 16,877 on 7 December 2011. Out of 199 such funds, 94 fell less than the Sensex. Only one, SBI Magnum Emerging Businesses (2.8%), gave a positive return during the period.
The picture would not have been as gloomy if one had invested in a staggered manner through systematic investment plans, or SIPs, instead of in one go. If you had started monthly SIPs with equal amounts on 1 January 2011 in all diversified equity funds, your average return would have been -9.11%. If this money had been invested at once on 1 January 2011, your corpus would have shrunk 19%.
Debt funds provided some relief. During the oneyear period ended 7 December 2011, income funds gave an average return of 8.4%. Fixed maturity plans, or FMPs, a popular short-term debt instrument, gave 6.5%.
Strategy for 2012
For long-term mutual fund investors, the strategy is simple. Invest in a staggered manner for at least three-five years without bothering much about volatility and immediate market sentiment. Here are some ways to build a good portfolio in turbulent times:
Do not get deterred by market volatility: Even if equity markets remain in the bear grip for another couple of years, do not get perturbed. This offers an opportunity to buy mutual fund units cheap.
Experts predict more correction in 2012 which investors should use to buy. Another 10% decline will bring valuations to even more attractive levels, says Rahul Rege, business head, retail, Emkay Global Financial Services.
"Volatility is expected to remain a key theme in 2012," says Sankaran Naren, chief investment officer, ICICI Prudential AMC. He says any market correction due to global worries should be used to invest.
Invest through SIP: Timing equity markets is the last thing a retail investor should try. Investors should instead adopt a market-agnostic approach. The best way is to invest through SIPs and systematic transfer plans (STPs). In an SIP, one invests a fixed amount in a mutual fund at regular intervals-daily, monthly or quarterly. An SIP ensures disciplined investment irrespective of the market movement. This helps you average your cost through market cycles and amass a big corpus without taking too much risk.
In case you have a large sum to invest, do not put the whole amount in an equity fund at one go. Instead, invest in a debt fund, ideally a liquid or ultra shortterm fund, and regularly transfer a fixed smaller amount to an equity fund.
"It is always difficult to time the market and investors should do systematic investing. SIPs are the best way to invest in equity funds," says Navneet Munot, CIO, SBI Mutual Fund.
Rebalance portfolio: Equity markets in India have fallen 20% since December last year and so have the net asset values, or NAVs, of equity mutual funds. See if the share of equity in your portfolio has fallen sharply. If it has, it is time to invest in good equity funds and restore the balance. "The most important thing is to follow the asset allocation strategy. This means if your planned 30% allocation to equity has fallen 5-10% due to the market correction, you must increase your equity exposure," says Sankaran Naren.
"Investors well below the desired equity exposure could buy in a phased manner while others may wait for a correction," says PVK Mohan, head, equities, Principal Mutual Fund.
However, avoid unnecessary changes in the portfolio. As Navneet Munot says, "There can be tactical shifts in asset allocation depending on the market view. However, the core allocation pattern should be maintained with discipline." The core portfolio should ideally comprise a mix of large- and multi-cap funds.
Also, you must increase exposure to large-caps. "In the recent market slump, a lot of quality large-cap stocks have fallen significantly and offer a good investment opportunity," says Pankaj Pandey, head of retail equity research, ICICI Direct.
Avoid sector and theme funds: Investors should stay away from sector- and theme-based funds during market volatility. Sector funds could be cyclical and thus more prone to volatility. Diversified funds are, therefore, the safest bet at present. However, investors who already have exposure to such funds must not exit in a hurry. Stay put till the markets turn and your losses are pruned or wiped out.
Sankaran Naren says sectors are cyclical in nature and may take time to play out. "Those who have invested in sector funds should, therefore, stay invested," he adds.
Cushion your portfolio with debt: Investment in equity funds should be for the long term. However, cushion your portfolio against equity market volatility by getting locked in the high-yield debt funds.
"Invest in debt funds for one-two years. If the RBI starts reducing interest rates, long-term debt funds will gain from rising bond prices. Investing in these funds at current levels will be a wise move," says Raghvendra Nath, managing director, Ladderup Wealth Management.
Investing in mutual funds through an SIP may not give the kick that daily trading gives, but when it comes to investing for the long term, a disciplined approach is better than direct speculative investment in stock market. Follow the strategies mentioned above and don't try to be too adventurous with your hard-earned money.
Both the Sensex and the National Stock Exchange Nifty had trespassed into the over-valued zone and the debt crisis in Europe had started to unfold. Inflation was rising, the Reserve Bank of India (RBI) was raising rates and protests over corruption were getting louder. A sharp correction looked imminent.
2012: Cash or Cataclysm?
The mood this year is no less sombre. The European debt crisis is far from over. Back home, the government is yet to show serious commitment to policies that can support a seemingly tottering economy.
Morgan Stanley said in its 2012 India outlook report that inflation was moderating, setting the stage for monetary easing. However, it said, volatility emerging from a weak developed world could hold back Indian equity markets. It predicted a 16% upside for the Sensex in 2012. "We expect the market to make steady upward progress in 2012, marked by volatility," it said.
Are these signs positive enough for small investors to bet on stocks in 2012? If yes, what should be their strategy? How should they prepare for market shocks? We discuss how mutual fund investors should take market upheavals, should there be any, in their stride and get good returns over the next three-five years.
Fund Performance in 2011
Let's press the rewind button and see how equity mutual funds have fared in the past one year. The average oneyear return by diversified equity funds on 7 December 2011 was -16%, with the best performing fund giving a 28% return and the worst -38%. The Sensex fell 15.34% from 19,696 on 8 December 2010 to 16,877 on 7 December 2011. Out of 199 such funds, 94 fell less than the Sensex. Only one, SBI Magnum Emerging Businesses (2.8%), gave a positive return during the period.
The picture would not have been as gloomy if one had invested in a staggered manner through systematic investment plans, or SIPs, instead of in one go. If you had started monthly SIPs with equal amounts on 1 January 2011 in all diversified equity funds, your average return would have been -9.11%. If this money had been invested at once on 1 January 2011, your corpus would have shrunk 19%.
Debt funds provided some relief. During the oneyear period ended 7 December 2011, income funds gave an average return of 8.4%. Fixed maturity plans, or FMPs, a popular short-term debt instrument, gave 6.5%.
Strategy for 2012
For long-term mutual fund investors, the strategy is simple. Invest in a staggered manner for at least three-five years without bothering much about volatility and immediate market sentiment. Here are some ways to build a good portfolio in turbulent times:
Do not get deterred by market volatility: Even if equity markets remain in the bear grip for another couple of years, do not get perturbed. This offers an opportunity to buy mutual fund units cheap.
Experts predict more correction in 2012 which investors should use to buy. Another 10% decline will bring valuations to even more attractive levels, says Rahul Rege, business head, retail, Emkay Global Financial Services.
"Volatility is expected to remain a key theme in 2012," says Sankaran Naren, chief investment officer, ICICI Prudential AMC. He says any market correction due to global worries should be used to invest.
Invest through SIP: Timing equity markets is the last thing a retail investor should try. Investors should instead adopt a market-agnostic approach. The best way is to invest through SIPs and systematic transfer plans (STPs). In an SIP, one invests a fixed amount in a mutual fund at regular intervals-daily, monthly or quarterly. An SIP ensures disciplined investment irrespective of the market movement. This helps you average your cost through market cycles and amass a big corpus without taking too much risk.
In case you have a large sum to invest, do not put the whole amount in an equity fund at one go. Instead, invest in a debt fund, ideally a liquid or ultra shortterm fund, and regularly transfer a fixed smaller amount to an equity fund.
"It is always difficult to time the market and investors should do systematic investing. SIPs are the best way to invest in equity funds," says Navneet Munot, CIO, SBI Mutual Fund.
Rebalance portfolio: Equity markets in India have fallen 20% since December last year and so have the net asset values, or NAVs, of equity mutual funds. See if the share of equity in your portfolio has fallen sharply. If it has, it is time to invest in good equity funds and restore the balance. "The most important thing is to follow the asset allocation strategy. This means if your planned 30% allocation to equity has fallen 5-10% due to the market correction, you must increase your equity exposure," says Sankaran Naren.
Risk-Mitigation is the Mantra Sandesh Kirkire, CEO, Kotak Mutual Fund The near 16% decline in the value of the rupee against the dollar has not only increased the import bill but it also portends a potentially inflationary pressure on the economy. In such a likelihood, the RBI would be constrained in its scope to tinker with the monetary policy. The moderation in food inflation, though, has reduced the chances of a hawkish monetary stance. Thus, in case of a reversion in stance, we may see the overall economy gear up by the second half of 2012. The markets are likely to remain watchful of these events and may look for additional cues before setting onto a fresh path. Since the performance of the equity market usually tends to forerun the economic performance, we may expect the sentimental undercurrent in the equity market to begin to look upbeat or down beat depending on that outcome. On the debt market side, short-term debt yields that have hardened due to acute liquidity shortage may begin to temper down as liquidity starts easing. This may provide for potentially competitive performance possibility at the near term of the yield curve. The performance of long duration funds would again be dependent on the supply status and the monetary policy prevalent in the next fiscal. The outlook for gold remains largely bullish on account of the growing investor wariness arising from European debt crisis. However, the possible strength in the dollar due to declining global risk appetite may prove to be a restricting factor. From an investor view point, the period of high volatility remains a distinct possibility. Therefore, prudent allocation and risk-mitigation must remain the mantra for 2012. (This is a sponsored article) |
However, avoid unnecessary changes in the portfolio. As Navneet Munot says, "There can be tactical shifts in asset allocation depending on the market view. However, the core allocation pattern should be maintained with discipline." The core portfolio should ideally comprise a mix of large- and multi-cap funds.
Also, you must increase exposure to large-caps. "In the recent market slump, a lot of quality large-cap stocks have fallen significantly and offer a good investment opportunity," says Pankaj Pandey, head of retail equity research, ICICI Direct.
Avoid sector and theme funds: Investors should stay away from sector- and theme-based funds during market volatility. Sector funds could be cyclical and thus more prone to volatility. Diversified funds are, therefore, the safest bet at present. However, investors who already have exposure to such funds must not exit in a hurry. Stay put till the markets turn and your losses are pruned or wiped out.
Sankaran Naren says sectors are cyclical in nature and may take time to play out. "Those who have invested in sector funds should, therefore, stay invested," he adds.
Cushion your portfolio with debt: Investment in equity funds should be for the long term. However, cushion your portfolio against equity market volatility by getting locked in the high-yield debt funds.
"Invest in debt funds for one-two years. If the RBI starts reducing interest rates, long-term debt funds will gain from rising bond prices. Investing in these funds at current levels will be a wise move," says Raghvendra Nath, managing director, Ladderup Wealth Management.
Investing in mutual funds through an SIP may not give the kick that daily trading gives, but when it comes to investing for the long term, a disciplined approach is better than direct speculative investment in stock market. Follow the strategies mentioned above and don't try to be too adventurous with your hard-earned money.
