Three strategies for mutual fund investors in a volatile market

This time, there is no room for central banks to support the economy with any kind of stimulus like rate cuts. Governments also won’t be willing to stretch their finances by providing fiscal stimulus. Even though the probability of worst case scenario in terms of the spread of Omicron virus is less, central and state governments would not like to take any chances, having burnt their fingers earlier. Hence, simply as precautionary measures, they would not relent on full-scale lockdowns, travel bans and restrictions which can impact economic activities. Irrespective of whether Covid spread would be severe, subdued or transitory noise, financial markets do not like such uncertainty and this will cause volatility in the near term across financial markets.

If you juxtapose the current scenario to March 2020, then again defensive sectors like IT and pharma will do well, which will reflect in performance of these thematic funds. Funds oriented towards largecap quality names may be better off as there can be relative flight to safety.

Should investors be nervous or trim their position from equity funds?

Investors must understand that equity investments are volatile and should maintain a long-term horizon when it comes to investments in equity as an asset class. We normally recommend that at any given point in time, only the money that you don’t need at least for the next 5 years can be part of your long-term equity wealth creation portfolio so that you are not troubled with such short-term fluctuations in markets. Such investors must continue to hold their investments. With massive fiscal and monetary economic stimulus, we are headed towards strong economic recovery followed by a high growth phase as reflected in several high frequency economic indicators. So barring the near-term volatility, long-term outlook looks promising.

Also, markets have already corrected and valuations have again come to more reasonable levels. We are still about 4% lower from all-time peak after the correction. So in fact, it’s a good opportunity for investors who were waiting on the sidelines to take advantage of this volatility and build or add to their long-term equity portfolio at lower levels.

The following mutual fund strategies will do well in a volatile market:


1) Systematic investment plan (SIP): Because of rupee cost averaging, in an SIP you end up buying more units when markets are down and less units when markets are up. So such volatile times help your SIP investments to reduce your average holding cost and are an ideal way to invest in such uncertain scenario where it is difficult to predict market tops, bottoms & directions in the near term.

2) Systematic transfer plans: People having lumpsum cash to invest can create a synthetic SIP by making lumpsum investments in liquid fund and set up a weekly/fortnightly or monthly transfer plan to equity funds. The idea is to invest in equity funds in a staggered manner and allow rupee cost averaging to play to your advantage.

3) Asset allocators & balance advantage funds: These funds invest in a mix of assets like equity, debt and in some cases, gold. If equity markets go down, the proportion of equity holdings in fund portfolio will go down and then when the fund manager rebalances their portfolio, they would move partly from debt to equity, thereby buying equity investments at lower prices. Basically, “Buy low, sell high” is automatically built in such investments which works well in volatile markets.

(The author, Suvajit Ray, is Head of Products and Distribution, IIFL Securities. Views are his own)