It's important to stay invested in markets amid sell-off, say experts

Volatility will remain because of tightening liquidity, uncertainty on earnings growth, say market experts

The benchmark Sensex and Nifty have plunged more than 7 per cent this month. Given the risk-off sentiment globally, it is likely that May could go down as the worst month for equities since March 2020, when markets crashed in the immediate aftermath of the pandemic’s outbreak. However, market experts say it is important to stay invested now.

In the past 24 months, the domestic markets have delivered negative returns on only eight occasions—that too not more than 4 per cent. While the indices witnessed several bouts of correction, they have managed to bounce back.

Market experts say if the ongoing correction drags on, this will be the first big test of patience and resilience of domestic investors, who have consistently invested in stocks either through mutual funds (MF) or directly.

Investment experts say, given the headwinds such as tightening of liquidity and earnings growth uncertainty, the markets will remain volatile. They believe investors would be better off entering the markets in a phased manner and should not invest large sums at one go.

“Among several critical questions that impact equity markets, rising government yields and the impact on economic growth have assumed greater importance. Hence, equity markets could display higher volatility till these factors ease up and greater clarity emerges on their impact,” says Anoop Bhaskar, head of equity at IDFC Asset Management Company (AMC).

In the past month, the S&P BSE Sensex has declined nearly 10.23 per cent, while the S&P BSE MidCap and S&P BSE SmallCap are also down 14.81 per cent and 16.35 per cent, respectively.

Foreign portfolio investors (FPIs) have yanked out $3 billion from domestic stocks this month, taking their year-to-date selling tally past the $20 billion-mark.

A large part of these outflows have been offset by purchases by domestic investors. Sustained flows into MF equity schemes have given fund managers the ammunition to invest in the markets.

Equity funds saw net inflows of Rs 78,946 crore between January and April, shows data from the Association of Mutual Funds in India (Amfi).

Trideep Bhattacharya, chief investment officer, equities, at Edelweiss MF, says the near-term outlook is volatile, while the medium-term outlook is constructive. “We expect markets to remain volatile till we get clarity on factors such as early signs of peaking out of inflation, an accurate gauge of interest rate trajectory globally, and bottom-up green shoots of capex cycle,” he said.

Equity funds have also seen their returns get impacted by the correction in the Indian markets. On an average, large-cap funds have generated returns of -9.39 per cent in the past month. The performance was worse in mid- and small-caps, where average returns fell 11.71 per cent and 13.50 per cent, respectively.

Market participants say remaining invested in the markets is more important now as such an approach will ensure full participation in the upside even though it may not limit downside risk.

Sorbh Gupta, fund manager – equity, at Quantum AMC, says: “Such macro challenges, market cycles will come and go multiple times in an investor’s journey of achieving financial goals. One should not be swayed too much. Investors should stick to their asset allocation plans and use a staggered approach to increase allocation to equities.”

Most fund managers say they are optimistic about market opportunities from a medium- to long-term perspective as domestic cyclical recovery takes shape and corporate earnings return to an upward trajectory after adjusting to the inflationary challenges.