The year 2022 started on a volatile note with capital markets across asset classes witnessing a sharp correction amid investor concerns over tighter monetary policy settings in 2022 and geopolitical tensions. The benchmark index BSE Sensex has fallen over 3,000 points in the last 15 days, which is in line with the fall in global equity markets seen during the month. From its 52-week high levels, the index is down by 4,000 points, at 58,000. The expectations and uncertainty surrounding the Union Budget also led to volatility in equity markets. How should a mutual fund investor react to the slowdown in the stock market? Is it time to redeem or invest more to gain out of lower NAVs?

Midcap and small caps have witnessed higher volatility in the last few months after having outperformed in the last two years. Year-to-date, mid cap mutual funds on an average have fallen by 2.5% and small cap funds have gone down by slightly over 2%. In fact, all equity mutual fund categories are in red YTD, except for banking and PSU funds.

Technology funds, after remaining the best performers for a long duration, have taken the maximum hit of an average 12% YTD, followed by pharma sector schemes (-8.5%) and international schemes (-7.5%). Large cap funds, flexi cap funds and large & mid cap funds have plummeted by little over 2%.

Investors should consider this fall as an opportunity to add more investments. In general, a 10% correction is an attractive enough “dip” to follow the time and tested “buy on dips” allocation strategy, says Sachin Jain, research analyst, ICICI Securities. "Investors may, therefore, allocate some lumpsum amount at current levels apart from their regular SIPs," he adds.

Image : Amit Sharma

For the large cap segment, as per Rushabh Desai, founder of Rupee With Rushabh Investment Service, corrections anywhere between 10% and15% and for the mid and small cap segments, 15-25%, are considered to be decent correction pockets. However, even with the current correction and the company earnings prices and valuations in many segments in the equity markets remains high or expensive. Also, with the fear of new Covid-19 variants, supply chain disruption, high inflation, liquidity tightening and normalisation of policy rates (rate hikes) process etc. markets will remain volatile especially if company earnings don’t outperform, he explains. Thus, 2022 is the year to be extra cautious.

For lumpsum investors who have investable amount, Desai suggests waiting for a decent and a deeper correction pocket before deploying their money. SIP investors should continue their investments and need not worry. Correction pockets should be looked at as an opportunity to invest for the long term.

"This is a good time to assess your overall portfolio and reallocate your capital to schemes where the valuations are comfortable," says Divam Sharma, co-founder of Green Portfolio, a SEBI-registered portfolio management service. He recommends value funds to be preferred over growth funds in the current markets and believes that IPO and start-up related funds should be avoided for now.

"We believe, says Sharma, that the worst of fears in terms of rate hikes, inflation and Covid-19 spread are getting priced in. The markets can reach a bottom soon as we see the actual event of interest rate increase happening," he adds.

Sectoral funds need careful selection

Investors looking at sectoral bets should be extremely careful as well. The highly volatile markets have led to various sector funds or market cap funds moving from best performing to worst performing within a short period of time. Banking funds, says Jain of ICICI Securities, after having underperformed have shown sharp improvement in performance in the last one month. Similarly, while IT funds remain best performing funds for a longer duration, they are the worst performing category of funds in the last one month with -10% return.

"Volatility, in general, is likely to be higher over the next few months. The higher volatility will continue to lead to sharper rotation of performance within sectors and market segments. Investors should be extremely careful while investing sector funds," says Jain.

Redeem if goal is near

Whenever the investment goals are nearing in 2-3 years, the investors should gradually start reallocating capital to safer, high credit quality and liquid fixed income asset classes. As per Divam Sharma, investors may move to short duration fixed income funds, if the goals are a few years away. While the long-term prospects of Indian equity markets look robust, the volatility can continue for a few quarters and can impact the financial goals, he says.

Investors whose goals are still 3 to 4 years away can stay invested for some more time, says Desai.

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