Equity markets turn volatile: How should mutual fund investors deploy money today?

On August 6, Indian indices reversed some of the losses and were trading more than 1 percent in the green.

Indian equity markets made a smart recovery on August 6, a day after the US recession fears and the unwinding of the yen carry trade, triggered by an interest rate hike by the Bank of Japan, triggered a global meltdown that saw the Sensex and the Nifty plunge almost three percent.

At around 11 am, the Sensex and the Nifty were trading in the green but had pared some of the early gains.

“Global markets have corrected sharply due to a disappointing job scenario in the US that led to recession fears in the US coupled with the fear of a reverse yen carry trade, following an interest rate hike in Japan,” HDFC Securities managing director (MD) and chief executive officer (CEO) Dhiraj Relli said.

A rotation away from the technology shares that have powered this year’s rally is also being seen. Investors and analysts are debating whether the US Federal Reserve will need to accelerate its policy easing to support growth, he said.

As the Indian market reversed some of the losses on August 6 morning to trade in green, what should be investors’ strategy?

Stay the course

As the volatility continues, financial experts advise mutual fund investors to exercise caution and refrain from making big investment decisions on both buy or sell sides.

"As valuations further rise, these sudden down moves might become more frequent. Equity markets’ returns are never linear,” said Siddharth Alok, Assistant Vice President-Investments, Multi Ark Wealth-Epsilon Money Group.

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The news coming from Japan is not good for equity markets but the direct impact on Indian markets remains limited, expert say. While global markets are down 10-20 percent, Indian markets are hardly down 5 percent, they say.

“Investors should have a check on their overall asset allocation and if their investing horizon is more than three years, these dips might be bought," said Alok.

Stick with SIPs

Mutual fund strategies differ from direct stock investing. You do not typically aim to book profits, halt new investments, or heavily invest in stocks based on market movement.

Long-term investors, who have well-diversified portfolios and have their long-term monthly investments through systematic investment plans (SIPs), should continue to stay invested.

While the possibility of a US recession is bad for the sentiment and can lead to correction across the globe markets but the markets, where the domestic economy is stronger can rebound faster than others. The Indian economy is likely to be more resilient than other smaller economies; hence, investors could look to add at market corrections.

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Investors with the ability to hold for the long term should look to invest over the next few weeks of correction in a systematic manner in pockets where valuations are not stretched,” TRUST Mutual Fund CEO Sandeep Bagla said.

“This is likely to be a medium-term correction, which will provide long-term investment opportunities for the patient investor. One must keep return expectations low in the short term, keep investing systemically over the medium term with an eye to reap benefits from the growth over a long period of time," he said.

Avoid risky pockets

The market is expected to rotate away from low-growth, low-quality segments toward companies with strong fundamentals and sustainable growth prospects, Wisdom Research said in a note.

There is a higher probability of price correction in the smallcap index if earnings don’t catch up, Capitalmind Financial Services has said.

The BSE smallcap 250 index has been on the up after the Covid crash of 2020. After a break of 15 months, from January 2022 to March 2023, the index has been on the rise since April 2023.

“The one-year period ending July 11 2024, the P/E multiple of BSE smallcap 250 has expanded by 63 percent, whereas earnings per share (EPS) is flat at -3 percent. This showcases the expansion of the P/E multiple of BSE Smallcap 250 in the last year is mostly due to the increase in price,” Capitalmind Financial Services said in a note.

“The continued flat trajectory in the earnings could escalate to a high probability scenario of price correction in the smallcap index.”

Diversify risk

Bonds tend to be less volatile than stocks. Their prices fluctuate less in response to market changes, providing stability in times of market turbulence.

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“During uncertain global equity markets, portfolio diversification is the key to sustaining long-term investment returns. Investors have largely been focused on equities, which have provided tremendous returns in the past. However, given the big global moves, it is prudent to invest in other liquid low- volatility financial assets such as bonds,” said Vishal Goenka, co-founder IndiaBonds.com.

An investor’s response to corrections in the market should be guided by their financial goals, risk tolerance and investment time horizon. It is important to understand the long-term potential of equities and consult with financial advisers or distributors to assess the market situation before making any changes to the portfolio.

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