Funds Withstanding The Fall

Based on the analysis and the returns generated by mutual funds, only three categories have delivered positive returns during the last three-month period. These include two sectoral funds, which are pharmaceutical funds and technology funds, and the other being thematic, which are international funds. The article takes a closer look at the performance of the market and advises investors on the right strategy to adopt in such volatile times 

Investors, not only from the equity market but also those who generally switch to or opt for mutual funds for peaceful investing, are extremely concerned about the current volatility and uncertainty in the market. The Large-Cap, Mid-Cap or Small-Cap funds, which were showing tremendous strength not long ago, are now delivering negative returns in the short term. Perhaps you feel the same and find yourself asking the same question repeatedly. [EasyDNNnews:PaidContentStart]

What should I do in such a situation, and when will this situation come to an end? Turning attention to the performance of the Indian market, the S & P BSE Sensex has fallen from 85,978 to 77,340, representing a decline of around 10 per cent in just 34 trading days ending November 19. Similarly, the NSE Nifty 50 index has dropped from 26,277 to 23,453, reflecting a fall of approximately 10.74 per cent during the same period. 

Investors are now wondering: Could this market correction be a blessing in disguise for mutual fund investors? The market’s recent turbulence largely stems from foreign portfolio investors (FPIs) exiting the market, withdrawing an unprecedented ₹94,017 crore in October alone. However, domestic mutual funds have emerged as market champions, injecting ₹90,000 crore to stabilise the ship. While this trend has not yet stopped, the amount of selling by FPIs has decreased. 

MF Industry Overview
In October, mutual fund investments witnessed substantial growth, with equity funds increasing by 21.70 per cent to ₹41,887 crore. The total assets under management (AUM) climbed to ₹67.25 lakh crore. All the three segments i.e. small-cap, mid-cap and large-cap experienced strong demand during the month. Large-cap funds saw inflows nearly double compared to September, rising to ₹3,452 crore. 

Mid-cap funds recorded a 50 per cent jump in net inflows, reaching ₹4,683 crore, while small-cap funds registered a 23 per cent increase, attracting ₹3,772 crore. The mutual fund industry also saw remarkable growth in systematic investment plans (SIPs) during October. A total of 63,69,919 new SIPs were registered, pushing SIP AUM to a record ₹13,30,429.83 crore. The SIP contribution hit an all-time high of ₹25,322.74 crore in October 2024, up from ₹24,508.73 crore in September 2024. 

Analysing the above data across different categories of mutual funds reveals that returns over a three-month period provide a broader perspective compared to focusing on one-month data. Based on the analysis and the returns generated by mutual funds, only three categories have delivered positive returns during the last three-month period. These include two sectoral funds, which are pharmaceutical funds and technology funds, and the other being thematic, which are international funds. Among these, technology funds and international funds have outperformed their benchmark indices. However, pharmaceutical funds, while delivering positive returns, have fallen short of outperforming the benchmark indices as per the data presented above.

International Mutual Funds
International mutual funds, which are also referred to as global or foreign funds or sometimes overseas funds, are investment vehicles that pool capital from various investors to create a diversified portfolio of stocks or bonds issued by companies and governments outside the investor’s home country. These funds provide exposure to the international markets, enabling investors to capitalise on global economic growth opportunities. The average return of all the international mutual funds is around 7.5 per cent over the past three months. Not only that, but they have also outperformed their benchmark index, which recorded negative returns during the same period. 

Looking at the data above, international funds have effectively managed volatility in global markets, delivering positive returns over the past three months. In recent days, international markets, particularly the Chinese and US stock markets, have shown significant strength, while the Indian markets have faced challenges. As evident from the performance of international funds and funds of funds (FoFs), these funds have delivered positive returns over the past three months. 

You might wonder whether this is now the right time to switch over to these funds. Instead of a complete shift, investors should consider diversifying geographically. Allocating around 10-15 per cent of your total portfolio to international funds can provide diversification benefits. It also allows investors to capitalise on the growth of economies where these funds are invested. 

Technology Mutual Funds
As discussed above, the Indian markets are currently underperforming, having corrected by around 10 per cent following a significant rally. The reasons for this underperformance include FPI selling, weak Quarterly Results, valuation discomfort and the ongoing geopolitical tensions such as wars in different regions of the world. Not only have the major frontline equity indices fallen, the impact can be seen in the various sectoral indices too. Nonetheless, technology funds have shown good resilience. 

It is generally observed that when the Nasdaq performs well, Indian IT stocks or the Nifty IT sector tend to follow the trend to some extent. This correlation could be attributed to the significant export of IT services by Indian companies to international clients, including those in the US market. Additionally, the sector benefits from increasing US interest rates, as the resulting depreciation of the Indian rupee boosts expected future cash flows of local currency and profit margins for these companies. 

The Indian IT companies primarily offer services such as cloud migration, digital transformation and legacy IT outsourcing across various sectors, including BFSI, healthcare, consumer discretionary, consumer staples, communication services, media and entertainment, oil and gas, and more. Many Nasdaqlisted high-tech companies are also among their clients. Even during economic downturns, outsourcing often increases as companies seek cost efficiencies. Technology firms frequently collaborate with Indian IT service providers for their cloud platforms and services which eventually bring positivity in their balance-sheets and profit and loss accounts. 

Pharmaceutical Funds
The pharmaceutical sector has provided returns of up to 30 per cent in 2024 so far. Over the last three months, on an average, pharmaceutical funds have managed to deliver a positive return. And although not very impressive, they have managed to outperform the broader market. However, the pharmaceutical funds have not outperformed their benchmark index during the same period. 

In the long term, as healthcare demand grows driven by demographic shifts, lifestyle diseases and advancements in medical technology, the sector is poised to deliver strong returns. Investors with a moderate to long-term horizon could benefit from strategically allocating around 5-10 per cent of their portfolio to pharmaceutical and healthcare funds. As the demand for healthcare continues to grow due to various factors, the sector has the potential to deliver strong returns over the long term. 

Is the Downturn an Opportunity?
Given the fact that we are all well aware of the current market conditions, this correction presents an attractive opportunity for those with additional funds to capitalise on long-term growth potential. For mutual fund investors, the present scenario offers a strategic window. Investors can view these market dips as opportunities to strengthen their portfolios, particularly as the markets typically recover over time, reflecting economic resilience. For those with additional funds, this level presents an attractive investment opportunity. 

However, timing the market by trying to predict the bottom and investing a lump sum in one go is not advisable. Instead, investors should consider pyramid investing. For example, an investor with ₹1 lakh can follow a pyramid investing strategy by spreading the investment over a certain period. If the market is experiencing a dip, the investor can start by allocating 30 per cent of the total amount (₹30,000) initially. 

If the market dips further, the investor can deploy another 30 per cent (₹30,000) at the lower level, and finally, if the market reaches an even lower point, they can allocate the remaining 40 per cent (₹40,000). This approach reduces the risk of investing all the money at once and allows the investor to take advantage of lower price levels. Additionally, investors must not stop their SIPs and should continue investing in their existing funds. It’s important to remember the financial goals for which they started their investment journey. 

Conclusion
The market comes with ups and downs, and it is unavoidable. As investors, we cannot control it, but what we have control over is our continuity in contributing to investments with the same dedication when the market performs well, rather than stopping the SIPs. Investor must not time the market as for the same you need to make two correct decisions: First, when the market reaches a high and could fall, and second, when it hits the bottom from where the market could take a U-turn and rally upwards – and you need to be right in both the cases. 

Secondly, investors who have lump sum cash to capitalise on opportunities should use the pyramiding technique, as the market is unpredictable and no one can predict it 100 per cent. Additionally, adding sectoral funds and international funds can provide diversification benefits, which will help manage the portfolio well in tough times and reduce the overall portfolio risk. 

Furthermore, investors must carefully consider sectoral and international funds before opting for them. It’s also important to remember that short-term returns should not be the sole reason for investing in them. Rather, the focus should be on the long-term returns and wealth creation. In brief, investors need to accept the fact that markets can turn volatile at any given moment and the best path to take is to maintain your composure and take decisions that will help your investments bounce back and not get eroded. 

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