Markets continue to slide: What should mutual fund investors' strategy be?

Indian equity benchmarks have come under heavy selling pressure since the turn of the year.

Indian equity benchmarks closed lower on January 21 with Nifty around 23,000 amid selling across the sectors. At close, the Sensex was down 1,235.08 points or 1.60 percent at 75,838.36, and the Nifty was down 320.10 points or 1.37 percent at 23,024.65.

As volatility continues in the Indian markets in the new year, experts advise mutual fund (MF) investors to exercise caution and refrain from making substantial investments, both on the buy and sell sides.

Indian equity benchmarks have come under heavy selling pressure since the turn of the year as the Nifty 50 corrected 2.5 percent on a year-to-date (YTD) basis till January 21. The broader markets have seen deeper cuts as the Nifty 500 is down 4.1 percent during the same period. Further, the Nifty Midcap 150 is down 5.6 percent, and the Nifty Smallcap 250 has plunged 7.1 percent.

According to experts, the current correction in the Indian equity markets can be attributed to several factors like expensive valuations, slowing domestic growth, US Federal Reserve's shallow rate cut cycle and US dollar resurgence.

Also read | Can CoinSwitch’s Rs 600-crore plan help WazirX investors recover their losses?

“A key consideration for India is the impact of the Fed's shallow rate cut cycle. Even if domestic inflation settles around 4 percent, the Reserve Bank of India (RBI) may not be able to cut rates aggressively as the rupee can potentially depreciate further. This could force the RBI to defend the INR more aggressively, which, in turn, would lead to a drawdown in forex reserves,” said Kunal Valia, Founder, StatLane.

Looking ahead, he believes it is essential for investors to remain vigilant and adapt to the shifting market landscape.

"Despite global challenges, India continues to be the fastest-growing economy among major nations, reflecting its resilience. Factors such as sustained domestic economic growth, political stability, prudent reforms, infrastructure investment, healthy corporate finances, ample foreign reserves, controlled twin deficits, stable crude prices, and lower commodity inflation protect India from external shocks and position it for future growth," said Vinay Paharia, Chief Investment Officer, PGIM India Mutual Fund.

Paharia is optimistic on investments in high-growth and good-quality companies with a medium to long-term investment horizon.

How should investors navigate this period?

As the markets continue to be volatile, financial experts advise MF investors to exercise caution. As valuations rise further, sudden downmoves might become more frequent.

At the same time, note that equity markets’ returns are never linear.

Also, MF strategies differ significantly from direct stock investing. Unlike stock trading, these investors typically do not focus on booking quick profits, halting new investments, or making heavy market-timing decisions based on short-term fluctuations.

Also read | What NRIs need to know about Indian income tax rules

Long-term investors with well-diversified portfolios who consistently invest through systematic investment plans (SIPs) should remain invested to achieve their financial goals.

Although the possibility of a strong US dollar could negatively impact global market sentiment and trigger corrections, markets with stronger domestic economies tend to recover more quickly.

For instance, over the long term, the Indian economy is expected to be more resilient, compared to smaller economies. As a result, investors may consider adding to their portfolios during market corrections.

According to Motilal Oswal Financial Services, 2024 saw a notable change in the sector and stock allocation of funds. The weight of defensives improved by 60 basis points (bps) to 30.3 percent, propelled by an increase in the weights of healthcare and telecom, while consumer and utilities moderated.

Experts believe that the market may move away from low-growth, low-quality segments towards companies with strong fundamentals and sustainable growth prospects.

Also read | Why individuals must invest long-term, avoid day trading & derivatives

Also, since sectoral funds tend to perform in cycles, a diversified flexi-cap fund may be a good choice, as it offers fund managers the flexibility to adapt to changing conditions across market caps.

Further, by distributing investments across various asset classes, such as stocks, bonds, real estate and cash, the poor performance of one investment can be offset by another investment. The strategy is less likely to impact your entire portfolio significantly.

While equities and bonds are the basic building blocks of any portfolio, other asset classes such as gold and real estate helps in further diversifying your assets.

An investor's approach to market corrections should align with his financial goals, risk tolerance, and investment time horizon. Recognising the long-term growth potential of equities is crucial. Before making any portfolio adjustments, it is advisable to consult your financial advisors or distributors to evaluate the market conditions and ensure that decisions are well-informed.

Also read | You cannot make money without a long-term mindset