All long term investors must take advantage of this correction by increasing their SIPs instalments
Monday’s near 2000-point bloodbath in the Sensex has pushed investors to the edge. Coming as it did after a steady decline over the past couple of weeks, this heavy fall necessitates some rear-guard action from retail investors.
A viral disease has been giving the chills to markets around the globe, with China facing the brunt. Markets across the most world have corrected significantly over the past few weeks. Indian indices have steadily declined ever since the outbreak of the Coronavirus epidemic came to light in mid-January. To make matters worse, the RBI superseded the board of Yes Bank and has, along with the Government, set in motion a draft rescue plan with the State Bank of India stepping in as an investor. The issue of writing down the value of AT1 bonds has shaken investor confidence and has caused much distress to debt mutual fund managers.
Crude oil prices too have fallen off a cliff as it were, crashing to $36 a barrel from $68 levels at the start of the year. The twin concerns of a slowing global economy as a result of the spread of the epidemic and Russia’s refusal to agree to production cuts have meant that oil is on a slippery wicket.
After a steady rally for the better part of February, the Sensex and Nifty have corrected nearly 15 per cent, while the BSE Midcap and BSE Smallcap indices have fallen by 13-14 per cent from their recent highs made last month. FIIs net sold (more sold than bought) Rs 1735 crore to 3340 crore each day from February 24 to 28 in the equity markets, according to data from regulator SEBI; they have net sold Rs 9137 crore totally thus far this month (till March 6).
In contrast, domestic mutual funds had net purchased Rs 1460 crore to Rs 6531 crore in the last few days of February, while net selling paltry sums only for a couple of days. In March thus far, domestic MFs have net bought (bought more than they sold) Rs 3825 crore in the equity markets. Clearly, local mutual funds seem to be considering this fall as an opportunity to pile on to quality stocks that may have corrected significantly as collateral damage in the market carnage, what with SIP (systematic investment plan) investors pouring in more than Rs 8100 crore every month.
As a retail investor in MFs or direct equity, you would have helplessly watched a significant portion of your portfolio value being shaved off. So what should you do now? No knee-jerk reactions. Steady your nerves and reassess the situation. Past data (illustrated in the table) on MF SIPs clearly indicates that irrespective of market highs or lows, steady investments are rewarded over the long term.
History on SIP investors’ side
For investors who stuck on through the thick and thin of the markets, rewards have been fairly forthcoming over the long term.
Just take the record of three funds picked randomly – one each from the large, mid and small-cap categories. Axis Bluechip, Kotak Emerging Equity and Nippon India Smallcap (Reliance Smallcap earlier) have been analysed for their performance by PrimeInvestor (see table).
Three highs and lows of different years in the past decade have been considered for analysis. That is, had an investor started an SIP from those specific periods, what would she have generated as returns till March 1, 2020. For the highs, December 2010, October 2013 and January 2015 are considered. On the other hand, the lows of December 2011, January 2013 and December 2015 are taken into account.
Market corrections in these periods have ranged from 10-25 per cent from the highs.
It is assumed that Rs 10000 is invested every month from these periods till March 2020.
Quite surprisingly, for such long timeframes of five to nearly 10 years, starting an SIP from the highs or lows did not have a substantially large difference in returns.
So, monthly investments started in Axis Bluechip from December 2011 or December 2010 would have delivered 14.11 per cent and 13.83 per cent, respectively. The story repeats for Kotak Emerging Equities and Nippon India Smallcap. Of course, these examples may not be hold for the entire categories to which they belong. Also, timing the highs and lows is well-nigh impossible for retail investors. These examples must not be considered as recommendations.
But the limited point is that highs and lows matter more for lump-sum investments, not for very long-term SIP instalments. And large corrections should mean that there is a better entry point for investors.
Is it the right time to step up investments?
The old cliché of ‘time in the market rather than timing the market’ holds for long-term investors, also illustrated from the example given above. For investors is it an opportune time to step up their MF investments?
“All long term investors must take advantage of this correction by increasing their SIPs instalments or number of SIPs. With accommodative macro policies, benign global environment and a nascent economic recovery this is time to be aggressive in investing,” says Aashish Somaiyaa, MD & CEO, Motilal Oswal AMC
Suresh Sadagopan, Founder, Ladder7 Financial Advisories, advocates deploying long-term money, but adds a word of caution and says, “The correction related to Corona Virus is a wildcard. No one can predict where it is all going. If one has some extra money awaiting deployment for the long term, one may invest at this point.”
Bringing in the important point about asset allocation, Deepak Jasani, Head Retail Research, HDFC Securities, says, “A lot would depend on whether the investors are fully invested or under invested in equities as per their asset allocation strategies. In case they are underinvested, then they can selectively look at doing staggered buying in select stocks or schemes.”
Should investors consider deploying lump-sums now, especially after a 15 per cent correction?
“SIPping is always good no doubt; but once in a while, when the Indian market corrects for reasons outside our borders and such corrections have the potential to play in our favour, GULPing (lump-sum) is advisable,” says Aashish.
Suresh gives a nuanced strategy for lump-sum deployment:” Lump-sums can be invested if one anyway has surpluses which one wants to deploy. It could be done in 2-3 tranches. Else, if one wants to go through the automated route for investing in the next 30-40 days, one may even choose short-term weekly STPs (systematic transfer plans for 4-5 weeks.”
Have the mid and small-cap spaces become more attractive?
The steep correction over the past couple of weeks has meant that the mid and smallcap spaces have begun to look attractive for investors. For those looking at entering these segments through the MF route, it may be a good time to do so.
“While logically mid and small cap stocks could do well from hereon even as their valuations have become more attractive, investors will have to be selective in choosing the stocks/schemes,” says Deepak of HDFC Securities.
As such many funds operating in the mid-cap category have delivered robust returns even in turbulent times over the past couple of years. Emphatically making a case for investing in the space, Ashish of Motilal Oswal AMC says, “I have always been a strong votary of investing in midcaps. The one-year return for all good midcap funds is actually in double digits on the back of a sharp uptick in this space since October 2019 and the current correction gives a good entry point. Even with very poor performance from the space during Jan 2018 to July 2019, the five-year returns are still in high-single digits.”
But a note of caution may be in order. “Corrections like these give a small tactical window of opportunity. One should continue to go by asset allocation principles,” says Suresh from Ladder 7Simply put, while you should invest in equities, don’t go overboard in this correction and deploy all your investments in one go into the equity markets via mutual funds. Of course, there is definitely a case for using this decline to buy at lower levels. But keep a bit of debt (allocation to fixed income instruments such as debt funds, small savings, bank fixed deposits and so on) as well, depending on how much risk you can withstand.