All the equity mutual fund schemes, excluding a few sectoral ones, have delivered negative returns in the last six months. The returns range from -24% to -2.66%. Extremely volatile equity markets and gloomy returns spooked investors as evident from the reduced monthly collection by these schemes. Equity mutual funds recorded 44% lower net inflows worth ₹15,890 crore in April as compared to the last month, shows AMFI data. Investors, says Priti Rathi Gupta, founder, LXME, prefer to sit on cash and short-term debt securities because of the volatility in equity markets. What is the way forward for equity markets and how should equity investors invest in making the best use of the current market conditions? Here’s a lowdown.

The equity market is witnessing a sluggish period. The negative returns from equities, as per Viraj Mehta managing director - PMS, Equirus, should not be a cause of concern. Nasdaq is down 28% YTD. S&P 500 is also down 18% YTD. There has been a meltdown at the global level, especially tech, in the light of war, inflation, interest rates and liquidity tightening, lockdowns, etc. As far as the Indian region is concerned, the market indices have shed between 10-15% on a YTD. Despite FIIs being on a selling spree for the past 7-8 months, Mehta does not view this as a negative sign.

“If we compare these industry stats, it is pretty much evident that the Indian market has outperformed global markets. Additionally, this correction comes on the back of two years of spectacular returns which should be taken in stride by the investors,” says Mehta.

Looking at short-term returns harmful for equity investors

By nature, equity markets are volatile and returns generated by them are lumpy across time. The same holds true for equity funds. Investors should avoid reaching a decision basis short-term returns in equities. “Looking at returns over a period of 1 year or even shorter is almost certain to lead to a conclusion that is harmful to investors' long term wealth creation,” says Rajiv Shastri, director and CEO, NJ AMC. The recent performance of the equity markets and consequently equity funds, explains Shastri, can be described as ‘poor’ only if one has the unrealistic expectation that they will generate linear positive returns. Periods like this don't change the long term outlook for the markets, because the two aren't related, he says.

What lies ahead for Indian equity markets?

The long-term outlook for equities looks very robust. India is positioned well in terms of various economic parameters such as a pick up in capital expenditure and credit cycle, growth in exports, strong forex reserves, robust balance sheet, the reform led policy framework, etc. “If we look at the industry outlook for the next three to five years,” says Viraj Mehta of Equirus, the scenario is positive.

Sandeep Bagla, CEO, TRUST AMC, however, believes the outlook is mixed and uncertain. He says valuation wise, equities are not cheap by historical standards. And, valuation wise, growth which could have explained high valuations, is expected to come down. Rising interest rates would lead the bonds to start offering high fixed rates, and could also impact equity valuation in the short term. Additionally, the US Fed is reducing its balance sheet, which could further lead to the withdrawal of foreign funds from the domestic market.

Where should investors invest?

Those with a long term horizon can leverage this opportunity to increase their exposure to equities. As per Sandeep Bagla, investors must focus on the companies with strong balance sheets and pricing power in the current macro environment.

Divam Sharma, founder of Green Portfolio, SEBI Registered PMS provider, believes the time is right for investors to add funds in a regular and disciplined way via systematic investment plan (SIP) mode. “These are times when your investments ensure maximum compounding,” says Sharma. “Value stocks do well in inflation and rising interest rate scenarios hence, reallocation to value stocks should be considered by investors,” he adds.

Equities are long term assets expected to return 12%-15% over a long period of five to 10 years. One needs to identify the portion of their portfolio that one is not going to need for a long period of time, says Sandeep Bagla of TRUST AMC, and only that portion should be allocated to high-quality large-cap equity funds.

Those comfortable with taking sectoral exposure may look at sector-specific schemes like pharma, energy, and commodities, says Divam Sharma of Green Portfolio. He believes that investors should still stay away from new-age companies’ investment strategies.

Redeem when goal is 2-3 years away

As a rule, once close to a goal, one needs to start playing it safe. Goals with a residual period of less than three years, as per Rajiv Shastri of NJ AMC, are typically better met through debt investments than through equity, without any concern about the market outlook. Shastri explains, that even in the midst of a raging bull market, it makes the most sense to invest short term funds in debt and even in the most desperate bear markets; it makes the most sense to invest long term funds in equity.

“Investors having spending goals within a 3-year timeframe should be parking their funds in less volatile avenues like FDs or liquid funds,” says Viraj Mehta.

Investors must continue with logical asset allocation strategies despite the behaviour of the markets to benefit from the entire potential of the markets.

How markets are performing

All equity funds gave negative returns in 6 months. What should investors do?