STAY ON COURSE
Sandeep Singh
Posted online: Monday , March 17, 2008 at 1410 IST Updated: Wednesday, June 29, 2005 at 1257 hours IST -->
The consistent decline in the value of equity mutual funds over the last two months has left investors jittery. Instead of exiting, this is the time to back your belief in equities with hard cash
Anil Kumar, a 28-year-old software engineer employed with a Noida-based firm, experiences periodic bouts of blues these days. That’s not because the rising rupee has taken a toll on his company’s profits and resulted in markedly lower salary increment this year. It’s not even because the four-month stint that he was to enjoy at his firm’s Florida office beginning this February has been postponed in the wake of the slow down in the US. The reason Kumar is in a funk these days is that his mutual fund portfolio has lost nearly 20 per cent of its value over the last two months. Says Kumar: “For the last three years since I began investing, times have been good and I have mostly seen my portfolio go up. This decline has caught me by surprise. If the pain continues for another couple of quarters, I might just quit equity funds altogether.” Like Kumar, many investors are re-evaluating their mutual fund investments: is it just their scheme that is performing badly? Should they change the scheme? Or should they exit their equity funds altogether?
The big pictureOver the past two months the Sensex has declined by 23.5 per cent after peaking at 20,827 on January 11, 2008. Among direct investors in the markets, sentiment has turned negative following steep losses. Companies that are part of the Sensex have been among the biggest losers. Reliance Energy has lost 49 per cent, DLF, 43.12 per cent, ICICI Bank, 39.5 per cent, L&T, 34.6 per cent and NTPC, 31.9 per cent. While mutual fund investors normally do not trade on a day-to-day basis and have long-term investment horizons, the all-round talk of declines and losses has left many shaken.But fund investors needn’t worry. No doubt the NAVs (net asset values) of equity funds have declined. But as a fund investor you are not exposed to the risk of margin calls, as investors in the Futures and Options (F&O) market faced. Being diversified investment vehicles, equity mutual funds weather such declines better than individual stocks. What should also give you peace of mind is that your funds are managed by the best professionals.
Short-term under-performanceIf one studies the performance of the 164 schemes that have been in existence for at least one year (total number of schemes is 194), among the top 25 performers (on the basis of one-year returns) only two have underperformed the Sensex over the six-month period. However, only four of these 25 schemes have outperformed the Sensex in the last one month.Moreover, of the 103 schemes that outperformed the Sensex over the one-year period, only 29 have done so over the past one month. And only seven schemes of the 194 studied have outperformed the Sensex across all periods — one month, six months, one year, three years, and five years. While one month is too short a period for judging a mutual fund’s performance, the significant underperformance vis-a-vis the Sensex does raise concerns. In fund managers’ defence, Sanjay Sinha, chief investment officer, SBI Funds Management says: “If you try to outperform the market in the short term you may not be able to generate wealth for investors over the long term. Over the medium and long term funds have been outperforming. That’s what investment strategy should be geared towards.” What this implies is that investors should not worry too much about falling NAVs and underperformance in the short term.The fundamentalsWhile in the short-term the stock market may be influenced by a host of external factors, over the long term it reflects economic fundamentals such as GDP growth and corporate earnings. And here the picture continues to be reassuring.According to government of India estimates, GDP rowth rate for the year ending March 2008 will be 8.7 per cent. This could moderate further under the impact of a slowdown in the US. Says Abheek Barua, chief economist, HDFC Bank: “We are anticipating a slowdown from 9 per cent earlier to below 9 per cent now. In the worst-case scenario, it may go down to 8 per cent or a little below 8 per cent for 2008-09.” But even 8 per cent is a good number. Investment on infrastructure development and rising domestic consumption are expected to keep the economic engine humming. Corporate performance is expected to remain robust. “Over the long term I expect corporate profits to grow at 15-20 per cent. You could expect returns from the markets to be in that range,” says Sandesh Kirkire, chief executive officer, Kotak Mahindra Asset Management Company (AMC). Adds Ashu Suyash, managing director and country head, Fidelity Fund Management: “The global uncertainty and moderating growth estimates have led to the sell off in global markets and the current volatility. While volatility is expected to continue in the short-term it won’t have any major long-term structural implications for the domestic growth story.” Since the growth story remains intact, there’s no immediate cause for investors to panic.
Investment strategiesFocus on the long term. The current reversal should not bother you. You need not press the panic button and book losses, as for you the loss is only a notional one. Once the market stabilises your mutual fund portfolio will bounce back.Invest in the right schemes. With NAVs quoting at lows and the outlook for the long term strong, continue to invest in mutual funds, instead of exiting now and waiting for markets to recover. If you stop your Systematic Investment Plans (SIPs) now, you will miss out on the opportunity thrown up by the market (lower NAVs mean more units are allocated to you). Besides, when themarkets come roaring back, you will miss out on the next rally.New investors should pick up consistent performers — those that have done well across the one-, three- and five-year horizons (check Funds Data and Fund Watch column on page three). Stick to diversified equity funds that invest across market caps and sectors. This diversified fund should form the core of your portfolio. Around it you can later buy funds with more focussed mandates — such as those investing in large-caps or mid-caps.
Chop and change only if necessary.Since mutual funds have been under-performing for the last one month, you might be tempted to dump your current funds. Do not do so in haste. Says Amar Pandit a Mumbai-based financial planner “Only if the fund has not done well over the past four quarters should you consider exiting it.”Go for global diversification. In these volatile months, the only category of funds that has generated positive returns and outperformed the Sensex consists of schemes that invest abroad. Suggests Surya Bhatia, Delhi-based financial planner: “Invest 10-15 per cent of your equity portfolio in schemes investing overseas.”
Pick up NFOs with good investment ideas.Though it is usually better to invest in a scheme with a proven track record, currently when the market is at a low, investing in a new fund offer (NFO) with a sound investment theme is a good idea. Says Anup Maheshwari, head of equities and corporate strategy, DSP Merrill Lynch Fund Managers: “Fund managers of NFOs have the cash to pick up stocks now when they are available at a bargain.” Existing funds have little spare cash and may not be able to take full benefit of the current downturn.
If you truly believe in the power of the stock market to create wealth over the long term, this is the time to back your beliefs with hard cash. Continue with your systematic investment plans (SIPs).In fact, if you have some spare cash, invest now when NAVs are low and a given sum of money will buy you more units. At the end of a 10-20 year investment span, such a temporary reversal in the market will appear as another inconsequential squiggle in the stock market’s upwardly inclined graph — something not worth losing sleep over.
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