What Should Mutual Fund Investors Do Now?

The euphoria of the NDA’s clear win has turbocharged the equity markets. Or wait. Has it, really? Upon closer scrutiny, it becomes clear that the bellwether NIFTY index is trading barely 100 odd points higher than it did back in September ’18 and then again in mid-April ’19. This puts the fence sitters who sat out of equity mutual funds awaiting a ‘clear’ election result in a bit of a bind. Should I get in now, they ask? Is this the start of a secular bull run now that Modi 2.0 is in play? Or should I wait for a while, until a ‘correction’ takes place? Truth be told, it’s a bit of a sticky situation for Mutual Fund investors right now. Many of them are sitting on flat to negative returns even after investing for two years or more, and the consternation is growing. To make matters worse, the recent onslaught of credit events has spooked the debt markets too. While the next market movement is anybody’s guess, there are, fortunately, a few steps one can take to ensure that their Mutual Fund investments remain on track. Here are a few.

Look beyond Large Cap Funds

If you’re a risk-taking equity investor, you must gather your courage and look beyond large cap funds. The NIFTY’s trailing P/E ratio is hovering dangerously close to the 30X mark, and investors have good reason to be cautious. Ignore what analysts tell you about the “forward” P/E ratio looking attractive – analyst projections are notorious for missing their mark more often than not. Instead of large cap funds, consider large & mid cap funds, focused funds, small cap or mid cap funds (if you can stomach the volatility), sectoral & thematic funds, or contra funds.

Avoid FOMO – use STP’s to enter equities

So, you sat on the side lines for a long time, and are eager to jump in with both feet now that a messy coalition isn’t a worry any more. Your “FOMO” (Fear Of Missing Out) will drive you to rashly deploy all your money into equity funds at once, but you must fight the urge to do so. Stocks aren’t cheap right now, and a secular, one direction bull run isn’t a base case, but a best-case scenario right now. Use Systematic Transfer Plans to stagger your investments in a weekly mode over the next 3 to 6 months instead.

Don’t be quick to migrate to direct equities

The recent cut in Mutual Fund commissions has left most of the smaller distributors tottering in despair. While a handful continue to brave it out and build, quite a few of these intermediaries are making an attempt to reprice their product mixes and make them more economically viable. In doing so, they’re de-selling Mutual Funds in favour of direct equities, where the frequent churn is bound to net them exponentially higher commissions. Know that this is a terrible idea that will likely yield extremely poor results in the long run. Trading in stocks during volatile markets has seen many an investor burned, and there’s a high probability that you’ll end up joining their ranks. Give ‘trading’ based strategies a wide berth and remain invested.

Debt Fund Investor? Consider Credit Risk Funds

The Credit Risk category has seen its fair share of negative news flow in the recent past, with a number of heavyweights ranging from ILFS to Reliance Capital to DHFL undergoing downgrades. The current pessimism in the retail category suggests that a lot of the headwinds may be behind us. While HFC’s and their Asset Liability Mismatches so remain a concern, that’s just one segment of the borrowing market and shouldn’t be considered indicative of the credit market as a whole. With a number of well managed credit risk funds trading at double digit YTM’s (case in point: FT’s at 11.36 and ICICI Prudential’s at 10.51), this could well be an opportune time to deploy at least 50% of your debt portfolio allocation into this category. After all, yields have already plummeted more than 50 basis points over the past year and a rate cut on June 6 is probably already priced into current 10 year yields.