With benchmark indices Nifty and Sensex rising 76-77 percent from their March 2020 lows, and touching their lifetime highs just recently, equity mutual funds have been on a roll. Should you stop your systematic investment plans (SIP) as markets appear overvalued?
It has been a roller-coaster ride for mutual fund (MF) investors this year in 2020. Between January and March 2020, the frontline indices fell nearly 40 percent (from the high to the low) as the COVID-19 pandemic spread. But markets – and equity mutual funds – rebounded later. With the possibility of the COVID-19 vaccine being successful, the markets roared back to form.
The monthly SIP numbers released by AMFI (the mutual fund industry’s trade body) suggest that investors have started to take money off the table. Monthly contribution has slipped to its lowest in eight months. In November, the SIP flows were at Rs 7,302 crore.
“There has been a sharp run-up in markets. There is a general consensus that markets are quite expensive at these levels and may correct from hereon. So, some money is moving on the sidelines, waiting for correction to re-invest,” says DP Singh, chief business officer at SBI Mutual Fund.
AMFI data shows that in November, 7.24 lakh SIPs were discontinued (see chart) or their tenure ended.
Don’t stop, just re-balance
Financial planners advise against completely stopping your SIPs, or withdrawing all your investments (unless there is an unforeseen emergency), just because equity markets have seen such sharp gains in the past nine months.
“Investors can look at re-balancing their portfolios. So, investment portfolios would now have a higher share of equity investments as the run-up in the markets has the lifted value of these investments. Investors can sell a part of their equity investments to go back to their original asset allocation,” says Vidya Bala, co-founder of primeinvestor.in
For example, an investor’s portfolio may now have 65 percent equity investments and 35 percent debt investments. If the original allocation of the investor was 60:40 (equity:debt), he can shave off the five percentage points in equity investments.
This is also a good time to review your investment portfolio, as we are at the end of the calendar year. Bala adds that the investor should continue with the SIPs and stick to the habit of disciplined investing. “SIPs are not about timing the markets, but to allow your savings to run towards your goal,” she says.
Move long-term units to safer funds
“When it comes to a SIP that has been running for a long tenure, an investor can move his long-term units to safer investments,” says Shyam Sekhar, chief ideator and founder at iThought.
When you withdraw or redeem a part of your SIP investments, you get the earlier units as mutual fund redemptions work on a first in, first out basis. So, effectively, you are taking out your long-term units. And therefore pay the lower, long-term capital gains tax.
“Investors can take the money out in tranches and keep it in lower-risk funds. If markets correct, they can put this money back in the same scheme,” he adds.
A good way to temporarily park your profits, pending re-deployment, is in floating rate
or liquid funds
. These are short-term debt funds that come with the least amount of volatility.