After a super 2023 run, equity markets turn volatility in January. Should investors redeem?

According to experts, the valuations in the broader market had become excessive and unsustainable.

Volatility in Indian stock markets has made investors jittery. Since hitting fresh lifetime highs last week, the benchmark BSE Sensex has dropped around 3,000 points, while the NSE Nifty has shed 4 percent. After losing nearly 1,000 points on January 23, the S&P BSE Sensex went up by almost 689 points on January 24.

Given the slump and the accompanying volatility in Dalal Street, is it time investors should review their mutual fund investment roadmap?

Reasons behind the pain

On January 23, equity markets ended with the Sensex and the Nifty50 falling 1.5 percent each amid selling across the sectors, barring pharma.

“Major equity indices opened higher but slumped heavily to one-month lows during the day, led by selling in financial and FMCG stocks. Among the sectors, 11 out of 13 were in the red, led by Nifty Media and Realty sectors, which fell the most. The sell-off was deeper in the broader markets where the mid-cap and small-cap indices fell nearly 3 percent each,” said Avdhut Bagkar, technical and derivatives analyst at StoxBox.

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According to experts, valuations in the broader market had become excessive and unsustainable.

In 2023, midcap and smallcap indices surged 40-45 percent, led by investor inflows and rise in shares of these companies. “The trigger for the correction came mainly from the sustained selling by FIIs (foreign institutional investor), who have sold equity worth Rs 27,830 crore during the last five sessions. There is news that Sebi (Securities and Exchange Board of India) is tightening the ultimate beneficiary norms for FPIs (foreign portfolio investors) starting February 1. This might have triggered some FPI selling. Also, there is a rumour floating around that the finance minister may tweak the LTCG (long-term capital gains) tax taking away the advantages investors are enjoying now. Such rumours are normal during the budget time,” said VK Vijayakumar, chief investment strategist at Geojit Financial Services.

Experts expect further selling by FPIs and more corrections in the broader market. “Investors may wait for the market to stabilise. Safety now is in fairly priced largecaps," he said.

What should be your strategy?

In the last two years, there has been a substantial influx of funds into small-cap and midcap funds through mutual funds, while the flow into largecap funds has been comparatively restricted.

However, experts believe churn to happen in largecap stocks as the margin of safety is probably higher in this space, rather than in midcap and smallcap stocks.

“Traditionally, January has been a bad time for the Indian equity market on 80 percent of occasions. As a retail investor, if your goals are long-term in nature, then you shouldn't be worried about the short-term fluctuations in the market. Most of these could be a buying opportunity for a long-term investor. Long-term investors just need to stick to asset allocation,” said Kirtan Shah, founder of Credence Wealth Advisors.

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If you’re a short-term investor, then you should be slightly more careful, because markets are fairly priced, specifically in the small-cap and midcap spaces.

“In the near term or if your goals are near, you should start moving out of equity and into fixed income to make sure that when your goals are nearing, you have less volatility in your portfolio,” Shah added.

Stick to SIPs

The market falling 4 percent within a week is noteworthy. However, the decision for investors to modify their mutual fund investment strategy hinges on various factors unique to their financial objectives, risk tolerance and current investment portfolios.

According to experts, individuals investing through the systematic investment plan (SIP) method shouldn't alter their approach. This strategy enables investors to benefit from rupee-cost averaging over an extended period.

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It is crucial to understand that SIPs don't assure returns. Nevertheless, the anticipation is that markets will generally rise over the long term, proving advantageous for SIP investors.

On the other hand, lump-sum investors might consider a cautious approach given the current market conditions.