Markets Turn Volatile: What Should Mutual Fund Investors Do?

Market Outlook and Investor Strategies

Looking ahead, experts believe it's essential for investors to remain vigilant and adapt to the shifting market landscape. The market may move away from low-growth, low-quality segments towards companies with strong fundamentals and sustainable growth prospects.

Indian equity benchmarks have come under heavy selling pressure since the turn of the year. As volatility continues in the Indian markets in the new year, experts advise mutual fund (MF) investors to exercise caution and refrain from making substantial investments, both on the buy and sell sides.

Market Performance Overview

Indian equity benchmarks have seen a significant correction since the start of the year. The Nifty 50 corrected 2.4 percent on a year-to-date (YTD) basis till January 13. The broader markets have seen deeper cuts, with the Nifty 500 down 5.05 percent, the Nifty Midcap 150 down 8 percent, and the Nifty Smallcap 250 plunging 9 percent.

Factors Influencing Market Correction

The current correction in the Indian equity markets can be attributed to several factors:
- Expensive valuations
- Slowing domestic growth
- US Federal Reserve's shallow rate cut cycle
- Resurgence of the US dollar

Kunal Valia, Founder of StatLane, highlights the impact of the Fed's shallow rate cut cycle. Despite domestic inflation potentially settling around 4 percent, the Reserve Bank of India (RBI) may not be able to cut rates aggressively due to the risk of rupee depreciation. This could lead to a drawdown in forex reserves as the RBI defends the INR more aggressively.

Resilience of the Indian Economy

Despite global challenges, India remains the fastest-growing economy among major nations, reflecting its resilience. Vinay Paharia, Chief Investment Officer at PGIM India Mutual Fund, attributes this to:

• Sustained domestic economic growth
• Political stability
• Prudent reforms
• Infrastructure investment
• Healthy corporate finances
• Ample foreign reserves
• Controlled twin deficits
• Stable crude prices
• Lower commodity inflation

Paharia is optimistic about investments in high-growth and good-quality companies with a medium to long-term investment horizon.

Navigating Market Volatility

As markets continue to be volatile, financial experts advise mutual funds investors to exercise caution. With rising valuations, sudden downturns might become more frequent. However, it is essential to remember that equity market returns are never linear.

Mutual Fund Strategies vs. Direct Stock Investing

Unlike stock trading, mutual fund strategies differ significantly. MF investors typically do not focus on booking quick profits, halting new investments, or making heavy market-timing decisions based on short-term fluctuations. Long-term investors with well-diversified portfolios should remain invested to achieve their financial goals.

Opportunities During Market Corrections

Despite the possibility of a strong US dollar negatively impacting global market sentiment and triggering corrections, markets with stronger domestic economies tend to recover more quickly. Investors may consider adding to their portfolios during market corrections.

Motilal Oswal Financial Services notes a notable change in the sector and stock allocation of funds in 2024. The weight of defensives improved by 60 basis points (bps) to 30.3 percent, driven by increased weights in healthcare and telecom, while consumer and utilities moderated.

Experts believe the market may move away from low-growth, low-quality segments towards companies with strong fundamentals and sustainable growth prospects. Diversified flexi-cap funds could be a good choice, offering fund managers flexibility to adapt to changing conditions across market caps.

Diversification Across Asset Classes

By distributing investments across various asset classes, such as stocks, bonds, real estate, and cash, the poor performance of one investment can be offset by another. This strategy helps in minimizing the impact on the entire portfolio. While equities and bonds are the basic building blocks of any portfolio, adding other asset classes like gold and real estate further diversifies assets.

Aligning Investments with Financial Goals

An investor's approach to market corrections should align with their financial goals, risk tolerance, and investment time horizon. Recognizing the long-term growth potential of equities is crucial. Before making any portfolio adjustments, it is advisable to consult financial advisors or distributors to evaluate market conditions and ensure well-informed decisions.