What should Investors do with their Mutual Fund Investments during a Market Decline?
Indian equity markets have experienced downturns due to foreign investors withdrawing their money from India’s stock market. One of the biggest changes globally is the increase in US interest rates because of ongoing inflation, a rising budget deficit and uncertainty about US President Donald Trump’s policies. The interest rates are now at the levels last seen in 2007-2008 and the market expects them to stay high for a longer time.
As per a report by brokerage Motilal Oswal, individual stocks have declined more than what the indices suggest. On an average, stock prices have fallen almost twice as the index fell from its highest point.
75% of stocks from the Mid Cap 150 and Small Cap 250 index have fallen by more than 20% from their highest point ever. However, mid-cap and small-cap valuations still continue to be high-priced during such downfalls. On the other hand, large caps are reasonable as they trade below the 10-year average price-to-earnings (PE) ratio of the past 10 years.
The report suggests that the market is expected to remain in this phase for the next 3-4 months. It is advised that during this period, it is a good idea to gradually buy stocks, as prices might be lower, which might offer good returns in the long run.
Equity Allocation
Motilal Oswal has recommended increasing the allocation for the hybrid and large-cap equity orientated fund through a lumpsum strategy. while for Flexi, Mid and Small Cap Strategies, a staggered approach should be implemented. With the current interest rate scenario, long-term yields are likely to stay higher for a long period; therefore, they recommend staying away from duration strategies for fixed income investment and instead focus on accrual strategies in the fixed income portfolio.
Fixed Income Strategy
The report further highlighted that the duration play is coming to an end due to current interest rates and the long-term yield will remain higher for a long period. They recommend exiting the duration play. Actions by the RBI on rate cuts and liquidity could lead to the steepening in the yield curve. Motilal Oswal recommended focusing on accrual strategies in fixed income portfolios.
- 25%–35% of the portfolio can be invested in arbitrage funds with at least a three-month holding period, floating rates with 9–12 month holding periods, and absolute return/short strategies with a minimum of 12–15 month holding time.
- For tax-friendly fixed income options, 20%–25% of the portfolio may be allocated in Conservative Equity Savings funds with a minimum 3-year holding period.
- By allocating 45% to 55% of the portfolio to performing credit and private credit strategies, InvITs and select NCDs, accrual can be played across the credit spectrum.
