By Rahul Jain
Benchmark indices saw their worst decline in March 2020, falling by more than 20%, on the heels of COVID-19 being declared as a pandemic by the World Health Organisation (WHO). However, even the most optimistic investors haven’t expected such a remarkable turnaround, so early.
After the initial jolt, indices have recovered much of the lost ground, rebounding by 40% from their lows in March, riding on a long list of fiscal measures announced by the government and the Reserve Bank of India (RBI), to infuse liquidity in the system and boost investor sentiments.
At a time when COVID cases continue to surge, the strong revival of stock markets has cheered India Inc. and those bullish on the country’s growth prospects. Having said that, the developments surrounding markets from March until now, brought to the forefront, the usual behaviour adopted by investors, in times of crisis.
At the start of lockdown, it was the fear of losing out on market opportunities. Over the last four months, it now borders on fear of missing out as markets have taken everything into their stride, defying gravity and scaling new highs, every month.
While some pulled out of their investments, converting notional losses into actual ones in the process, others with capital to invest, exhibited patience and waited for the market to bottom out. This again reflects investor behaviour – people are blind to opportunities in a falling market. All it needed was patience and discipline. And no investment strategy can teach you that better than Systematic Investment Plans (SIPs).
Spectacular returns from mutual funds
Mutual fund investors, particularly equity investors, who continued with their investments during these turbulent times, have reasons to smile. According to data compiled till August 2, 2020, the median three-month-return from large-cap, large and mid-cap and multi-cap funds stood at 10.35%, 10.90% and 10.36%, respectively. The median return from equity-linked savings scheme (ELSS), during the 3-month period, stood at an impressive 11.14%.
Notably, returns from all equity schemes were in the negative territory, in the range of (-) 32-37% ], for the period between February 19 th to March 24 th 2020, when the Prime Minister announced the 21-day nationwide lockdown.
While liquidity injection to resurrect a faltering economy by the RBI, coupled with the stimulus package announced by the GoI, played its role in beefing up equity mutual fund returns during this period, addition of quality stocks by these schemes, into their portfolio, bolstered returns as well.
Note that in the market mayhem that followed in March, many fundamentally sound stocks became available at attractive valuations. Fund managers were quick to lap this opportunity and add them to their respective portfolios.
With India slowly unlocking its economy and in the light of a strong comeback from foreign fund flows (FIIs), these stocks have begun to perform well, augmenting fund returns, in the process.
Following the principles of asset allocation
The carnage in March also shone the spotlight, once again, on one of the core tenets of investing – asset allocation. Those who followed the principles of asset allocation and diversified their portfolio, had a softer landing vis-à-vis those who didn’t.
After a sharp market correction, the equity component of an investor’s portfolio would have reduced. With the right asset allocation, it would have been an opportune time to invest in equities through SIPs in mutual funds and buy more units at a lesser price.
Note that apart from helping you accumulate a corpus for various life goals in a disciplined and sustained manner, mutual funds also aid you in getting your asset allocation on the right track. By investing in equity MFs, debt funds and gold ETF, you can optimally diversify your portfolio, gain during bull runs and protect your corpus from taking a dip, when markets nosedive.
Thus, you can be objective in your investment decision making rather than being fearful of losing out during downturn or missing out during an upturn.
Have you missed the bus?
As evident, markets are on a growth trajectory and so are mutual funds. In case you feel you have missed the rally, not everything is lost. Note that while green shoots of recovery are visible in several macro indicators, market uptick hasn’t been broad-based.
While some entities have registered exponential growth, there are still a lot of companies and sectors that are poised for strong growth in the coming days. Therefore, the opportunity is not all lost. This is the right time to invest in mutual funds and ride the rally in the subsequent months, to make meaningful gains in the long run and add to your wealth.
Instead of committing a lumpsum, adopt the systematic investment plan (SIP) route, as it helps you better ride volatility and take advantage of rupee cost averaging. SIPs also help in case you are facing a liquidity crunch as you can start with as little as Rs 500 per month and top it up later. So, there’s enough opportunity for you to leverage this momentum and enhance your riches.
(Rahul Jain is Head of Edelweiss Wealth Management.)