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Equity funds disappointed in 2022. But there’s a way to turn them around

Patience and courage to navigate through periods of volatility and underperformance in equity investments are the price you have to pay to get handsome returns over the long term.

February 16, 2023 / 07:23 AM IST

After a good 2020 and 2021, 2022 was quite a disappointing year for investors. In 2020 and 2021, equity funds gave  16.2 percent and 33 percent, respectively. But in 2022, they gave just 3.15 percent.

After COVID-19, there has been strong media coverage about the multi-fold increase in the number of retail investors entering the market.

These retail investors are also credited for providing a huge depth to the market, since in a year when foreign portfolio investments (FPIs) have seen record outflows, the markets didn’t crash. Rather, it remained relatively balanced due to the huge SIP and other equity inflows.

But for investors, especially those who entered after 2020, this is the first time when they have seen either nil or negative returns and their portfolios are showing, at best, low single-digit annualised returns. This is compounded by two factors.

- The outlook for 2023 doesn’t necessarily seem positive as there is the threat of an impending recession in developed markets, and there is worry that more pain may be ahead

- Fixed income, which for the last two years, was also providing 3-4 percent annualised returns, has now turned attractive. This has further reduced the risk appetite for equity investors

There are possibly two key questions that investors would be having in their minds, which they would be impatiently and nervously seeking answers to.

1.  Should I be exiting my equity investments because of their non-performance in the last two years?

These are three simple checks and actions you can take

a)  If any of these investments are required for your needs in the next 24-36 months, you should exit them and move the monies to safer risk-free assets, such as liquid or money market funds

b) If these investments are meant for periods beyond 3 years, this is a good time to review your holdings and check whether the underperformance is more market-linked or there is some underlying issue specific to the stock or fund.

- If it is fund or stock related, go back to the investment thesis and check what has changed. If the original thesis holds, this might be a temporary slump and doesn’t warrant an exit.

- If it is specific to international holdings, where the carnage is much higher, with losses ranging anywhere between 10 to 40 percent, depending on the geography and the timing, do an underlying investment thesis check. Also, you need to get an investment outlook view on the specific geography, and then take a call

Also read | Mutual Funds: Why investing in last year’s winner may prove to be a dud

c)  With local markets near life-time highs, this is also the right time to identify investments that may no longer be good long-term bets and get rid of them. Use this opportunity to clean up your portfolio and make it more future-ready.

If you have an adviser or distributor, speak to them and get a portfolio review done. This will give you the peace of mind whether you are sitting on the right investments for the long term.

2.  What should I be doing with any additional liquidity that I have?

Again, this is a question best answered from a perspective of your investment horizon. The following two checks and actions should provide you a signal.

a.  If the investment horizon is short, less than 3 years, your money needs  to be in a safe asset class like debt.

b.  If your investment horizon is long term, your asset allocation will help you decide the right asset class. Asset allocation is a key tool that helps you keep your risk in your portfolio at the optimum level. Check your portfolio asset allocation and use the below filters to take a decision.

- In case equity allocation is lower than needed, use long duration STPs (systematic transfer plans) to move lump sum investments into equities. A decent alternative right now, especially if you are not confident about riding through the volatility expected in the short term, is to invest these monies in well-selected dynamic hybrid funds, which are also called balanced advantage funds

- If you have adequate equity allocation, fixed income looks attractive today, based on where the interest rate cycle is poised.

- It is best to continue your SIPs, assuming it is for the long term. As part of a portfolio review, you can check the category (cap, geography, style) allocation to see if any tweaks are needed

Due to the short-term underperformance of equity, you need to also check the impact on your goals, and what should be the mitigation actions, if any, including tweaking your asset/category allocation or portfolio.

Again, speaking to your adviser or distributor to understand how your plan is poised and whether your asset and category allocation needs any action currently will help you take decisions that are right for your financial health.

Having the patience and courage to navigate through periods of volatility and underperformance in equity investments are the price you have to pay in order to get handsome returns from a good equity portfolio over the long term.

That said, using these tools can help you take decisions in a structured and rational way, especially during troubled times.

Girish Ganaraj is Co-founder, Finwise Personal Finance Solutions
first published: Feb 16, 2023 07:23 am