5 Mutual Fund Investment Questions - Answered

Despite the industry’s collective AUM soaring past the soaring past the 38 Lakh-Crore mark in April ‘22 it’s a fact that Mutual Fund investing still remains confusing for many. With stock markets remaining reactive and volatile, and global as well as local factors hampering debt fund returns, the year 2022 has indeed been a confusing time for investors. Here are 5 common questions that Mutual Fund investors are asking right now – simplified and answered, jargon-free.

What kind of debt funds should I invest in right now?

If you’ve invested into debt funds over the past couple of years, you’ve likely had a harrowing time! A deadly cocktail of rising inflation and crude prices, the falling Rupee, and impending rate hikes from global as well as the domestic central bank, have sent yields rocketing. As a category, GILT Funds have barely delivered 0.7 per cent returns over the past 12 months. Thought bond yields have already risen significantly, there’s no immediate trigger in sight that could check them. Stick with short term debt or floating rate funds. Medium duration debt funds could form 20 per cent of your portfolio as a tactical play.

Should I stop my SIP’s and restart them after the Russia – Ukraine situation becomes clearer?

Absolutely not. The very magic of long term SIP returns arises from the fact that that they average your unit costs through the ups and downs of the markets. The moment you begin to stop and start your SIP’s you take this away and severely compromise your potential long-term returns. Keep your SIP’s running in a disciplined manner and do not get too worried about short term lack of returns. In fact, SIP’s have traditionally worked best when the initial (accumulation) phase has taken place during severe bear markets!

I am a long-term SIP investor with a 100% equity portfolio, and my goals are two years away. What should I do?

You should follow the simple strategy of starting a 12–15-month STP from your equity funds into floating rate funds, short term debt funds or arbitrage funds. Don’t try to “time” your exit or take any drastic measures with your portfolio.

What should my asset allocation be at the moment, is I’m an aggressive investor with a 5 year plus horizon?

If you’ve already accumulated a portfolio (that is, you are not a long-term SIP investor who is presently building up a portfolio), you should ideally be more ‘risk-on’ at this stage considering that macros are looking fairly comfortable, and valuations are no longer stretched to the hilt. Aim for the following asset allocation: 20 per cent into dynamic asset allocation funds, 30 per cent into large cap and multi cap funds, 30 per cent into mid cap and thematic/ sectoral funds, and 20 per cent into lower risk funds for tactical plays in case of steep corrections.

Should I get out of equity mutual funds altogether, given that inflation is rising?

No, you need not take such as extreme measure. While valuations and global factors are certainly going to keep markets volatile for the remainder of 2022, there’s no need to press the panic button and move out of equity mutual funds altogether. In case markets see a sharp rally, you may want to temporarily move 50 per cent of your portfolio to low risk funds and immediately start 6-9 month, weekly STP’s back into aggressive funds from them – so as to benefit from this volatility.