5 Simple – And Powerful – Steps That Mutual Fund Investors Should Take Right Now

With both Equity & Debt markets playing spoilsport for the better part of 2018, many Mutual Fund investors, especially those who optimistically migrated away from the haven of Fixed Deposits, now find themselves between a rock and a hard place. The linear returns earned by most equity Mutual Fund investors in the previous calendar year and only exacerbated the frustration, as many investors went into the new year with similar return expectations. If you’re a Mutual Fund investor, here are five simple – yet powerful – things you can do to keep yourself on the right track.

Rebalance your Asset Allocation
This isn’t really the most opportune time to be overweight equities. A confluence of factors is indicating that equity markets may face headwinds in the medium term – inflation, global trade wars, the lack of robust earnings growth, a pressurised Rupee, and rich valuations in the form of a very high P/E multiple, to name a few. It’s time to move anything from 50% to 70% (depending upon your risk profile) to short-medium term debt funds.

Add some Small Caps
Within your equity portfolio, it’s time to add some small cap funds to your portfolio now. While large cap valuations haven’t corrected very significantly, small cap valuations have. In fact, the P/E ratio of the NSE Small Cap 250 index has dropped 30% from its April ’18 peak of 120, to around 84 as on date. Although this number is still stretched by historical standards, it makes sense to allocate around 20% of your equity portfolio to Small Cap Funds now, through 12-month STP’s (Systematic Transfer Plans).

Increase the share of Dynamic Asset Allocation Funds
Balance your small cap allocation with a couple of high quality Dynamic Asset Allocation Funds. This category of funds continuously rebalances their portfolios between equity, hedged equity and debt securities based on valuation multiples such as P/BV, P/E, M Cap/GDP or a combination of these. In volatile, directionless equity markets such as these, they provide good risk adjusted returns that are more tax efficient than debt funds returns.

Manage your Expectations
It’s worth bearing in mind that each market cycle provides different return generation opportunities, and aligning expectations to them based on common sense and rational analysis is not just the key to avoiding disappointment, but to ensuring that you take fewer emotional investment decisions as well. With the headwinds plaguing both equity and debt markets right now, an FD+200 basis point return from a well-managed, nicely diversified portfolio is actually a really good one. 

Continue your SIP’s
Many investors who commenced their SIP’s post the November ’16 demonetisation, are actually still in the red, much to their disappointment. However, stopping your SIP’s with the intention of re-starting them at a “better time” is a step that’s bound to backfire in the long run. SIP’s work on the principle of long -term rupee cost averaging, and history is replete with examples of low-return phases that suddenly gave way to high return phases, balancing out overall returns in the process. Keep them running resolutely!