MF Investing During Volatile Market

The current valuations are beaming mixed signals and the performance of the equity markets continues to look volatile. As such, it makes sense to take a look at the current market conditions before investing in mutual funds. In this article, DSIJ analyses the market waves and how they are affecting the tides of mutual fund investments.

Investing in mutual funds is an excellent way to grow wealth, but like any other investment it is not immune to market fluctuations. The performance of mutual funds is directly impacted by the overall market conditions and it is essential to understand how these conditions affect your investments. In recent times, the global equity markets have experienced mixed sentiments with some countries witnessing an upswing while others have faced challenges. 

In this context, it is crucial to evaluate the impact of current market conditions on your mutual fund investments. One of the primary factors affecting mutual fund investments is the performance of the equity markets, which is influenced by economic indicators, central bank policies and geopolitical risks. The market conditions can significantly impact your mutual fund investments. When the equity markets are performing well, the mutual fund returns can be higher. However, when the market conditions are challenging, the mutual fund returns may suffer.

Therefore, it is essential to evaluate the market conditions before making investment decisions. The Indian market has seen its fair share of ups and downs over the years and the current market conditions are no exception. At present the market seems to beam mixed signals which can indeed have a meaningful impact on your mutual fund investments. In this article, we will delve into the impact of the current market conditions on your mutual fund investments and what you can do to navigate through these challenging times.

Current Market Conditions

The month of March 2023 posted a mixed performance in the global equity markets. In the United States, equities, powered by growth companies such as technology, recovered after a succession of bank failures shifted market sentiment towards a delay in US Federal Reserve interest rate hikes. In March 2023, S and P 500 gained 3.5 per cent while the technology-heavy Nasdaq 100 gained 9.5 per cent. Instead, a comparable banking crisis that occurred across the Atlantic dulled the appeal of stocks. 

The FTSE index in the United Kingdom sank 3.1 per cent while the STOXX 600 in Europe declined 0.7 per cent. China stocks were subdued in March 2023 owing to sluggish industry activity. The United States (+3.5 per cent), Hong Kong (+3.1 per cent) and South Korea (+2.7 per cent) were among the Top Gainers internationally. Meanwhile, the most hit countries were the United Kingdom (-3.1 per cent), Brazil (-2.9 per cent) and Malaysia (-2.2 per cent). 

In March 2023, flows from overseas portfolio investors started to improve, bringing in ₹7,936 crore. On the economic front, consumer price inflation slowed somewhat to 5.66 per cent in March 2023. The S and P BSE Sensex index finished unchanged while the Nifty 50 index increased 0.3 per cent. Sector gainers were S&P BSE Power (+9.4 per cent), S&P BSE Oil and Gas (+2.8 per cent) and S&P BSE FMCG (+2.0 per cent). Among the laggards were S&P BSE Auto (-3.3 per cent), S&P BSE IT (-3.1 per cent) and S and P BSE Realty (-1.6 per cent).

As can be seen in the graph above, the overall equity market as represented by Nifty 500 has witnessed a great correction from December 2022 to March 2023 – a fall of around 11.2 per cent from its all-time high. This was the second time since October 2021 that Nifty 500 corrected from its all-time highs. Although as of now it seems to have recovered somewhat, the future path is still unclear. The Indian equity market has underperformed the global and Asian markets in the last few months, resulting in a moderation of premiums and making the market valuations more reasonable.

India’s long-term structural story remains strong and its macros are also much better placed in comparison to other major economies. The Union Budget’s focus on higher capital expenditure by the central and state governments, push for consumption through lower taxes and goal of fiscal consolidation together underpin India’s growth. Other positives include healthy tax collection, strong government reforms and India as one of the favoured destinations for China Plus One theme. Global cues such as the US and the UK central bank actions, geopolitical risks and foreign capital flows may continue to influence the equity markets.

On the Valuations Front

Indian stock market valuations are undoubtedly not cheap on a one-year basis. But take a five-year view and suddenly we are the cheapest among the emerging markets. So, what are the market valuations at present? To have a holistic view, we analysed the price-to-earnings (PE) ratio of Nifty 500.

As can be seen in the graph above, the overall market valuation, as measured by the PE ratio of Nifty 500, seems to be quite reasonable as it is trading below its historical average. However, looking at the forward PE would give us more insights into the market valuations.

As can be seen in the graph above, the one-year forward PE of Nifty 50 is 17.5 times while the historical average is 17 times. It is still above its historical average.

The graph above shows the market capitalisation to GDP ratio. The market capitalisation to GDP ratio declines from its FY21 highs of 107 per cent. However, it is still very well above its historical average of 79 per cent. Therefore, we can say that in terms of valuation the results are mixed. Therefore, fresh investments should be made on a cautious note.

Impact on Mutual Fund Investments

Mutual funds are a popular investment option for many Indians with the industry’s average assets under management (AAUM) standing at ₹40.05 lakh crore as of March 2023. Mutual funds invest in various assets, including equities, debt and gold, among others, making them a diversified investment option. The overall equity market has witnessed a correction and mutual funds invested in Indian stocks would also have been impacted. However, the long-term structural story of India’s economy remains strong and mutual funds invested in Indian stocks can be expected to perform well over the long term.

Since the recent correction in the equity markets, debt mutual funds seem to have outperformed other mutual fund categories. Even in Debt Funds, long duration funds, gilt funds and credit risk funds were the top performers. Overall, technology funds, Large-Cap funds and multi-cap funds suffered the most. On the equity side, none of the sub categories gave positive returns. That said, investors should consider their investment goals and risk tolerance before investing in mutual funds. Those seeking higher returns and willing to take on more risk may consider investing in equity mutual funds. Investors who are more risk-averse may prefer to invest in debt mutual funds or other less risky investment options. It is always advisable to consult a financial advisor before making any investment decisions.

Tips for MF Investors

In the current market conditions the growth path is still unclear in the medium term but this should not deter you from investing in mutual funds. Here are some steps you can take to navigate through such challenging times.

1. Diversify your Portfolio — One of the most important principles of investing is diversification. This means investing in a variety of assets to reduce your risk of loss. In the context of mutual funds, diversification means investing in funds that hold a mix of assets, such as stocks, bonds and gold. By investing in a diversified portfolio of mutual funds you can help mitigate the impact of any adverse market conditions on your investments.

2. Invest in Funds with a Long Term Outlook — Mutual fund investing should be approached as a long-term investment strategy. It is important to invest in funds that have a track record of performing well over the long term. Do not be swayed by short-term gains or losses. Instead, look for funds that have consistently delivered strong returns over several years.

3. Avoid Making Hasty Decisions — The market can be volatile and it is easy to get caught up in the hype. However, it is important to avoid making hasty decisions based on short-term market performance. Instead, take a long-term view and invest in funds that have a good track record of delivering consistent returns over time.

4. Regularly Review your Portfolio — It is essential to regularly review your mutual fund portfolio to ensure that it aligns with your investment goals. Review your portfolio at least once a year and make any necessary changes. This can include rebalancing your portfolio, where you sell off funds that have performed well and invest in those that have not performed as well. However, do not make changes based on short-term performance as this can be detrimental to your long-term investment goals.

5. Invest in Funds with a Good Fund Manager — A good fund manager can make a significant difference in the performance of a mutual fund. Look for funds that have experienced and reputed fund managers who have a good track record of delivering consistent returns. It is also important to ensure that the fund manager’s investment style aligns with your investment goals. Be sure to research the fund manager’s investment philosophy and approach before investing in a mutual fund.

6. Avoid Timing the Market — Timing the market is a risky strategy that can result in significant losses. It is impossible to predict the market’s movements, and trying to time the market can result in missing out on potential gains. Instead, focus on your long-term investment goals and invest consistently over time. This means investing regularly, even during periods of market volatility.
 

Conclusion

The current market conditions might have affected mutual fund investments but this should not deter investors from investing in them. Diversification, investing with a long-term outlook, avoiding hasty decisions, regularly reviewing your portfolio, investing in funds with a good fund manager and avoiding the temptation of timing the market are all strategies that can help you navigate through these challenging times. That said, it is advisable to take a long-term view while investing in mutual funds. Although the market valuations are showcasing mixed signals, it is recommended not to invest lump sum at the current juncture. It is advisable to start afresh or even continue with your existing systematic investment plan (SIP). Moreover, it is also prudent to keep 5 per cent of your overall portfolio in cash. This will help you invest when the market corrects further. It is also essential to keep in mind that mutual fund investments come with a certain level of risk. Doing your due diligence and research before investing in any mutual fund is important. Consulting a financial advisor can also be beneficial in making informed investment decisions. In conclusion, the impact of the current market conditions on your mutual fund investments depends on how well you have diversified your portfolio, your investment goals and your investment horizon. Sticking to a well-defined investment strategy and avoiding knee-jerk reactions to market volatility will help you achieve your long-term investment goals.