Stay Put in MFs

DO NOT GET OVERWHELMED BY THE SMART MARKET RECOVERY AND BOOK PROFITS. THE UPTREND IS LIKELY TO CONTINUE

Do not get overwhelmed by the smart market recovery and book profits. The uptrend is likely to continue

The stock market is on a roll again after falling steeply in March due to spread of coronavirus and the resulting lockdown. The benchmark Nifty has risen 43 per cent since March 24, when it had hit 7,511 (it closed at 10,768 on July 10). Equity mutual fund investors, whose portfolio had crashed 30-40 per cent, have a reason to rejoice.

Not just largecaps, even midcap and smallcap funds have risen up to 35 per cent since March 24, a signal that the recovery is broad-based. Most sectoral indices are also up significantly. Even the worst-performing theme – PSU – is up 27 per cent.

Is the worst behind us? Not necessarily. Coronavirus cases are still rising. While slowdown in the June quarter is a given, there may be negative surprises in the September quarter too. Most importantly, the recent rally has attracted a new breed of stock traders cooped up at home and trying to make a quick buck. A single negative trigger is all it will take for another downward spiral.

Whatever the situation months down the line, this is a good time to take stock of your MF portfolio and answer a key question — should you book profits, if any, or wait for a more opportune

time? It is a tough call, but experts say that broadly, your MF strategy should be long term and not depend on your ability to predict and time the market. It is a different matter if you need funds for an important life goal, though.

Post-Covid Recovery

Smallcap and midcap funds have widely underperformed largecap funds for a couple of years now. However, the recent recovery has been broad-based with largecap, largemidcap, multicap and even midcap and smallcap funds rallying 33-35 per cent. However, this doesn’t mean that all midcap and smallcap stocks are up. “Although small & midcap indices have seen a significant move, dispersion in returns across stocks is significant. For instance, a few stocks have fallen 25-30 per cent during this period, while several small-caps have risen 2x or more,” says Kaustubh Belapurkar, Director – Fund Research, Morningstar India.

Among sectoral funds, predictably, pharmaceutical funds have led the rally with 43.37 per cent gains, followed by energy and international funds, which are up 41.47 per cent and 39.97 per cent, respectively. Other sectoral funds are only slightly worse off. PSU, banking, MNC and consumption, at the lower end of the pecking order, have returned 2733 per cent in this rally.

Thus, unlike last year’s polarised rally, where top 8-10 stocks were steering the market, a very big chunk of the market universe is taking part in the current rally. “Apart from those such as Reliance Industries and Bharti Airtel, and to an extent HDFC Bank, stocks with top index weights have not rallied very sharply. Others have clocked good gains in past few months. Some stocks with top index weights, especially in financials, have seen a fall in weightage. The trends point to a broader rally than before,” says Bhavana Acharya, Cofounder, PrimeInvestor.in.

Why the Rally

Injection of fresh liquidity in markets, especially by the US Federal Reserve, to fight the coronavirus-induced recession, has given confidence to investors. Then there is the economic stimulus by various countries, flattening Covid curve in Europe and parts of Asia and hope about launch of a vaccine. “Market rallies are propelled by global sentiments and liquidity. Currently, our markets are following the global trend, especially the US. Besides, India weightage on MSCI index has been increased by 1 per cent. Additionally, FII net investment, along with investment by DIIs, has absorbed supplies and driven demand,” says S. Ravi, Managing Partner of Ravi Rajan & Co and former Chairman of BSE India.

However, in the domestic market, there are hardly any positive triggers, apart from partial lifting of the lockdown. This has made even foreign institutional investors (FIIs) iffy. FIIs, which pumped in a net ` 18,564 crore in Indian equities last month, have sold a net ` 2,210 crore so far this month till July 10. “There is no clear picture of the impact of the lockdown on economy and corporate fundamentals so far. Markets can reassess growth based on factors such as slower improvement in high-frequency indicators, impact on GDP when numbers come out, corporate earnings for the June quarter, credit growth and NPA trends of banks & NBFCs. Drying up of FII flows based on global developments and risk sentiment can also cause a correction,” says Acharya of PrimeInvestor.

Arun Kumar, Head of Research at FundsIndia.com, says while bad news may continue for some time, the perception change from ‘exceptionally bad’ to ‘bad’ is the point where the recovery starts. “In our view, this perception change (which is already happening), along with continued global central bank stimulus measures, remains the key for market recovery in the near term.” As US elections are on the

horizon, market participants hope that the government will continue its fiscal stimulus and the Federal Reserve will continue to provide easy liquidity. “The odds of the market falling back to previous bottom levels remain low in our view but a structural and sustained recovery needs a medical solution or a continued decline in spread of the virus.”

What You Should Do

Whatever the market direction, your exit strategy should always depend on primarily two factors. One, if the life goal for which you have been investing is near or not. Two, if you have to rebalance your portfolio. “We believe investors should plan their exit based on need for funds for life goals rather than market conditions. In our experience, most market timing backtests fail to provide the same level of profits in real life. So, if you have a financial obligation for which you need money in the next three years or less, you should start moving that money to liquid funds or cash. Else, stick to your long-term asset allocation and keep rebalancing the portfolio periodically,” says Gaurav Rastogi, Founder and Chief Executive Officer at Kuvera, an online platform for MF investments.

If you are looking at fresh investments, start with any category, but in a staggered manner, that is, through the SIP route. If choosing an MF scheme is an issue as almost all of them are up 30-40 per cent, go for index funds in respective categories, which have low cost and give average category returns. For sectoral/thematic funds, Kumar of FundsIndia says choosing such funds involves getting four things right - picking a winning theme/sector, selecting a fund that is well-placed to harness that theme/sector, valuations which haven’t already priced in the theme’s/sector's potential and ability to enter and exit the theme/sector at the right time. Since the odds of getting all the four right are slim, experts advise diversified funds over sectoral funds. “Long-term performance of a majority of thematic/sector funds has been mediocre. Given their non-diversified exposure, higher risk profile and need to time entry and exit, we recommend avoiding sector funds and sticking to well-diversified multi-cap equity funds. However, if investors still want to explore sector funds with the hope of boosting returns, they can use them to complement rather than replace core holdings,” he says.

However, as we are into a volatile market, this may be a good time to book some profits for efficient tax planning. “Investors should optimise portfolios to take advantage of tax rules. In India, the first ` 1 lakh of long term capital gains (LTCG) every year is exempt from the 10 per cent LTCG tax. Do not wait for February-March of FY21 to harvest gains and reduce LTCG taxes. Do it as early in the financial year as possible; as happened in FY20, you may not have any gains to harvest later,” says Rastogi of Kuvera.