D-Street Catches Flu… Here Is How To Approach Mutual Funds Now

Mar 06, 2020

I have been investing in mutual funds since a few years now and one thing that it has taught me is to be patient and disciplined in my investment approach. In the recent times, when everyone around me had been panicking about the impact of economic slowdown, weak corporate earnings, debt defaults, rising inflation, etc. on equity markets, I was convinced that sticking through my investment over the long term will help me tide over short term volatility.

As expected the market slowly started showing signs of recovery, until a bigger danger loomed over. Since the epidemic of coronavirus has started spreading across globe, equity markets have been plunging deep in red almost every day. Take today's instance -- the Nifty 50 has crashed 280 points. Overall all there has been a decline of 7.4% in the index since the beginning of the year, eroding the gains earned over the last few months.

Watching the investment value of mutual funds decline substantially in a matter of few days had me worried. It made me wonder whether this global phenomenon will have a long lasting impact on my investment. And I am sure you are worried as well.

But I soon realised that though controlling the spread of virus is not in my hand, surely the ability to control its negative impact on my investment is.

The situation no doubt is scary -- the virus has been spreading rapidly outside China including India. Coronavirus has infected over 98,000 people across nations so far and killed over 3,000 people.

Image by Gerd Altmann from Pixabay
 

Apart from the threat to human life, the virus is severely affecting global growth. Since China, the epicentre of the virus, is a major supplier of raw materials for sectors such as Pharma, Automobile, Electronics, etc., to various countries, shutdown in the country has led to production cuts in those sectors.

Further, with people cancelling travel plans to avoid contracting the disease, the travel and tourism industry is suffering. The economic impact of the virus induced significant selloffs in major global equity benchmark indices as they flocked to safe havens such as gold.

[Read: How the Pandemic of Coronavirus Is Helping Gold Investors]

For India, the United Nations has estimated the trade impact at $348 million. Moreover, The Organisation for Economic Cooperation and Development lowered India's GDP forecast to 5.1% from 6.2% for FY 2021 on concerns of virus impact. This spooked FPIs and they have turned net sellers in Indian market since February 2020.

Table: Coronavirus spread has hurt investor sentiments

Benchmark YTD (Absolute %)
FTSE 100 (U.K.) -11.10
Nikkei 225 (Japan) -9.84
NIFTY 50 (India) -7.39
S&P 500 (U.S.) -6.40
Hang Seng (Hong Kong) -5.04
Shanghai Composite (China) 0.71
Data as on March 06, 2020
(Source: ACE MF, investing.com)

How to approach equity mutual funds

The market crash as a result of coronavirus terror has impacted large, mid and small caps alike. Given the circumstances, it is unlikely that markets will find respite any time soon.

However, once the condition improves, markets are likely to make a strong comeback. The world has been through epidemics like SARS, Swine Flu, Ebola, etc. in the past and will recover from this as well.

But to benefit well from the recovery and to build long term wealth, ensure that your mutual fund portfolio is strategically placed to ride the ups and downs of the market.

`Core & Satellite' approach to investment is one of the most successful and time-tested strategy that lets you focus on the stable schemes with a long-term view and at the same time capitalise on short-term opportunities. This unique combination helps you generate superior returns without taking excessive risks.

The term `Core' applies to the more stable, long-term holdings of the portfolio, while the term 'Satellite' applies to the strategic portion that would help push up the overall returns of the portfolio, across market conditions. Plus, the 'Satellite' portfolio provides the opportunity to support the 'Core' by taking active calls based on extensive research.

The `Core' part can consist of large-cap fundmulti-cap fund, and value style fund and should form 60% of your portfolio holdings. Whereas, the 'Satellite' part of the portfolio (40% of holdings) should include a mid-cap fund, large & mid-cap fund, and an aggressive hybrid fund.

Through this diversification approach your investments will be well placed to provide a cushioning during the downside in a bear phase and outperform during a bull phase.

That said, if you are financial goal is approaching close, it would be better to shift your investments to safer avenues.

 

Warm Regards,
Divya Grover
Research Analyst

 

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Editors-note

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