Keep SIPs going in equity funds, stick to long investment horizon

The BSE Sensitive Index, or Sensex, has been volatile in the two trading sessions on Friday and Monday with a downward bias. Experts fear the current bout of volatility may not abate soon. Investors, therefore, need to remove any possible weaknesses that may have crept into their investment portfolios during the good times to be able to deal with the tougher days ahead. 

Liquidity conditions tend to be tight around this time of the year with companies paying quarterly taxes. The market has been under stress for some time due to IL&FS defaults and macroeconomic concerns surrounding the weak rupee, high crude oil prices, and high interest rates. On Friday, DSP Investment Managers sold non-convertible debentures of Dewan Housing Finance. This triggered worries that non-banking finance companies (NBFCs) are facing an asset-liability mismatch and liquidity concerns, sparking a selloff in the markets. Regulators like the Reserve Bank of India (RBI) and the Securities and Exchange Board of India (Sebi) tried to calm the markets by stating they will take steps to ensure stability.  

Volatility in the markets may continue. "The equity, fixed-income and currency markets have not been stable. Global headwinds arising from US-China trade wars and rising US rates will continue to affect the markets," says Ankur Maheshwari, chief executive officer, Equirus Wealth Management. He adds the relatively high valuations in the domestic markets, and the state and general elections that are set to take place will keep the markets volatile. "Strong measures by the regulators can stem the panic," says Ajay Bodke, chief executive officer and chief portfolio manager, PMS, Prabhudas Lilladher.  
 

One way to deal with market volatility is to have a long investment horizon. Kaustubh Belapurkar, director-manager research, Morningstar Investment Adviser India, says: "Equity fund investors need to stick to a horizon of 7-10 years." He adds that according to a study done by Morningstar India, over the past 20 years, if an investor had put money in a Nifty Exchange Traded Fund on any day and held his investment for at least seven years, he would never have made negative returns.  

Mutual fund investors with a longer-term horizon should continue with their systematic investment plans (SIPs). Those having lump sum amounts should opt for the systematic transfer plan (STP) route. "By stopping SIPs when the markets turn volatile, you run the risk of trying to time the markets, which is impossible for long-term investors to do," says Nikhil Banerjee, co-founder, Mintwalk.   
 

Investors who until now were riding the momentum in the markets should watch out. "Such investors could wait out the current volatility by shifting to liquid funds," adds Banerjee. Mid- and small-cap stocks, which have higher funding requirements, may suffer more due to high interest rates, so avoid being over-exposed to them. 

Debt fund investors should stick to shorter-duration funds. Joseph Thomas, head, research, wealth management, Emkay Global Financial Services, says: "Only when the 10-year bond yield touches 8.35-8.40 per cent should investors begin to take an exposure to duration-oriented funds." Also, avoid taking too much credit risk at present. "Stick to funds that invest predominantly in AAA-rated bonds," says Maheshwari. 
 

As for direct equity investors, with earnings improving, on the one hand, and stock market prices correcting, on the other, many strong franchises will become available at attractive valuations in the coming days. Bodke says: "Buy good franchises in a staggered manner."    

According to Maheshwari, "In a tough market, quality stocks get segregated from the poor-quality ones. And when the markets recover, the former show better recovery." Joseph suggests at a time when liquidity is low, cash-rich and debt-free companies will enjoy a premium.