Investing in Equity Mutual Funds means having to go through
a fair share of ups and downs.
Now despite most investors wanting to believe that they are
long term investors, history has proven again and again that more likely than
not, panic sets in when one’s Mutual Fund Portfolio goes in the red.
One of the many defenses that have been put forward is that
investors in developed and developing economies react differently to equity
investing, this again has been proven to not be as significant as it has been
made out to be.
Humans are humans after all,we react more than taking a
detailed stock of the situation before applying logic.
You cannot rationalize human emotions but you can always
learn to get a better grip on them.
In this article we look at what you should do when your Mutual
Fund Portfolio is in the red and under-performing.
Look at the Overall Market
> Look at the overall market conditions before forming an
opinion on your schemes.
> If the entire equity market is going through a difficult
phase then there is no reason for your Mutual Fund portfolio to be an
exception.
> Now let’s assume the overall market is at a healthy stage
but your mutual fund portfolio is still red, in such a case you would need to
look at the category of schemes that you have invested in.
> For eg. Mid & Small Caps tend to be more volatile than
Large Cap Funds so they are mostly affected by sensitive market conditions.
To put it simply, if the overall market is doing fine but
your portfolio is not then you need to have a detailed look at your mutual fund
portfolio.
Strategy
Do you have a strategy in place? If you do not have one then
it becomes very difficult to ascertain whether or not you are directed towards
your goal.
> More often than not investors invest in particular schemes
based purely on the basis of past returns and then panic at the very mention of
volatility.
> Having a strategy means you have a goal which in turn means
you have a plan to achieve that goal. If you do not have one then you would
keep on investing and redeeming with no chance of taking advantage of
compounding that comes with long term equity investing.
> Another benefit of having a goal is that it helps you know
how near or far your goal is. This in turn makes you realize that a long term
goal cannot be achieved with a short term mindset and helps you calm your
nerves.
Investing for high returns and redeeming due to market
corrections is not a goal, it never was and never will be.
Advice
There is absolutely no way anyone can ever predict the exact
movements of the equity markets. If anyone claims so then run away as far as
possible from them, this is good advice for both your money and health.
> When you work with an advisor you can from time to time take
a stock of your Mutual Fund portfolio.
> An advisor can help you stay calm and not panic during
difficult times, it is during such times that the real value of both an advisor
as well as having a plan really comes to the fore.
> The biggest blunder that most investors if not all commit is
paying attention to advice from friends, family, relatives, colleagues, random
strangers on the internet, etc. and yet when things go south, the same people
will not be overflowing with answers.
The issue is quite simple and straight forward, any advice that translates into action be it investing or redeeming should also be scrutinized when things go south. It is easy to give and take advice but not so easy being accountable for them.
Risk Profile
Investing in Equity Mutual Funds does have its fair share of
risks but a risk is only a risk when you do not know what you are doing.
There is risk and then there is calculative risk, the former means investing blindly keeping in mind only returns whereas the latter means trying to find a fine balance between risks and returns.
You need to keep in mind the following points:
a) Your age
b) Your time horizon
c) Whether any emergency fund has been kept aside
d) Your expectations
e) Your goals etc. among other important points
Risk is personal and not general and therefore so is Risk
Profiling.
There are several examples of investors in the past
investing in aggressive schemes like mid & small only for 2 years based
purely on past returns.
There are also several examples of investors of investing
their entire life savings into mutual funds when the markets have done
extremely well in one year.
Changes to schemes
If your Mutual Fund portfolio is in the red then also keep a
keen eye on any changes to your schemes.
There are several changes that could possibly affect your
portfolio, they are as follows:
a) Change in Fund Manager
b) Change in Scheme Category
c) Over exposure to one sector or scrip
Change in Fund
Manager
> Every fund manager has his or her own style in managing the
fund.
> For example Axis Large Cap Fund saw a change in fortunes
after changing their fund manager. Of course attributing the entire success to
the fund manager would not be fair but it surely did have an effect on the
performance of the fund.
Frequent changes in fund manager is never a good sign for an
AMC.
You need to give some quarters to a fund after changes in a
fund manager to make any decision.
Change in Scheme
Category
> After SEBI’s re-categorization exercise of 2018, except for
Multi Caps all other equity mutual funds have to deploy funds within the parameters
as decided.
> For example In the first half of 2019, Mirae Asset India
Equity Fund which was a Multi Cap Fund was converted into a Large Cap Fund.
> A Large Cap fund by SEBI mandate needs to invest a minimum
of at least 80% into stocks classified as Large Cap stocks.
> A Multi Cap fund is under no restriction and is free to move
around market sectors.
> Now imagine if you had invested in the Large cap fund
looking at returns of the fund when it was a multi cap fund, you would surely
be disappointed with the recent returns.
This is a prime example of why investing in a scheme based solely on past returns is a fruitless exercise, in fact after SEBI’s re-categorization of 2018 returns of most schemes has become redundant.
Over exposure to one
sector or scrip
> When a fund takes a heavy exposure to one sector or scrip
and that very sector or scrip is going through a difficult phase then chances
are your mutual fund portfolio will also reflect.
> Let’s say your fund has taken a good portion of its exposure to the petroleum sector which mind you is a very sensitive sector.
> Any recent event, be it changes in policy, prices or any
international event will have a bearing on the respective stock prices too.
Motilal Oswal Multi Cap 35 Fund and SBI
Large & Mid Cap fund had taken a sizeable exposure to Vakrangee and when
that stock tumbled, it did have a significant effect on those two funds as
well.
Asset Allocation
> Never invest your entire life savings in equity mutual
funds.
> Prior to investing, you should make sure you will not
needing the amount for at least the next 5 years, the longer the better.
> First time investors have clearly not seen the different
market cycles but even the ones who have, tend to get very jittery during a
market correction.
> When you have executed proper asset allocation, more or less
such worries are taken care of by themselves.
You need to align your investments with your goals by
dividing them accordingly, the following table will give you a rough idea.
Short Term Goals
|
1-3 years
|
Medium Term Goals
|
3-5 years
|
Long Term Goals
|
More than 5 years
|
Banks
If you are one of those naïve investors investing in mutual
funds via banks then please read the
following very attentively.
‘’Banks are not the most sensible option for Mutual Fund investing for
reasons mentioned below’’
> Imagine you walk into bank A that also has a Mutual Fund of
their own, do you really expect them to refer to you a Mutual Fund of another
AMC? Most likely NO !'
So then how are you
sure that you are being recommended the most suitable schemes?
> Now that we have
mentioned the term suitable above,
let’s try and understand this better.
> Hypothetically let’s
assume that you were recommended the schemes in your mutual fund portfolio by
Mr A. but who has since been transferred, whom do you ask for advice regarding
your queries now?
> In fact mutual funds
isn’t even his primary job so then how would you know if you are in the right
track when panic sets in during a market slump?
> There have been ample examples of banks miss-selling and miss-guiding innocent customers when it
comes to Mutual Funds.
There is a very strong reason why the top 3 Fund Houses in India in terms of AUM all have their own banks as distribution partners.
Several articles in
leading publications have already conducted various case studies affirming the
same, examples of some are shared below
Study by Economic Times (Leading publication)
Study by Valueresearch online (Online publication)
Ratings
So you have constructed your mutual fund portfolio purely on
the basis of ratings of schemes you came across in some magazine or online
website.
Here’s the issue with ratings though.
Most ratings on these online platforms and magazines are
uniform and that is a very troublesome feature.
Let’s try and understand this better with an example.
> Say you invested in a Small Cap Fund since it was a 5 star
fund whereas another Large Cap Fund was 4 star, now when the equity markets are
going through a correction the Small Cap Fund has also obviously taken a beaten.
> The Fund has now been downgraded from a 5 star to a 4 star
rated fund and you therefore also redeem.
> Large Caps are better equipped to handle a major correction
and the 4 star rated Large Cap Fund above is now rated as 5 star. You now
invest in it but after a couple of months realize the Small Cap Fund has now
outperformed the Large Cap Fund and therefore you now again shift towards the
Small Cap Fund.
> This chopping and changing is very detrimental to your
mutual fund portfolio since you never really gain any benefit of compounding that
one should ideally from long term equity investing.
> Star ratings change quarterly, unlike your goals so be
careful with the importance you attach to them.
Long term equity investing in mutual funds is never a linear
matter and nor should it be. Remember, if the markets do not have their fair
share of ups and downs then there would be no risks attached to them and if
there were no risks then where would the returns be generated from?
So keep it simple. Invest with a plan, avoid outside noise
and review quarterly with your advisor.
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Disclaimer : While due precaution has been undertaken in the preparation of this article, The Mutual Fund Guide or any of its authors will not be held liable for any investments based on the above article. The above article should not be considered financial advice and has been published only for your perusal. Due credit has been given in case wherever required, in case you feel any part violates any rights then do get in touch with us and we shall get it duly removed.
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