How Should a Novice Approach Mutual Funds amidst COVID-19

May 05, 2020

COVID-19 continues to pose a threat to life, businesses, and personal finances worldwide with no vaccine in sight. Amidst this, India has extended the nationwide lockdown (lockdown 3.0) by another two weeks as the active cases COVID-19 are nearing 30,000 and increasing every day.

Nonetheless, several vaccine trials have entered a critical stage now, and if successful, we might finally see some light at the end of the tunnel. Until then, lockdowns and physical distancing appear to be the only ways to deal with the virus.

The economic impact of the ongoing pandemic is severe. According to the International Monetary Fund (IMF), the Indian economy is likely to grow only at 1.9% in 2020 but may bounce back sharply at 7.4% in 2021.

To deal with the economic and business disruptions caused by the COVID-19 pandemic, the Confederation of Indian Industry (CII) has sought the economic stimulus package equivalent of 3% of GDP from the government. In other words, the industry body believes, the industry needs Rs 6 trillion to tackle the economic downturn.

At present, novice investors are confused not just about where to invest but also about whether or not to invest. Due to an uncertain economic environment surrounding COVID-19, the possibility of a financial crisis (perhaps even larger than the global financial crisis of 2008), and a global recession; a risk-aversion has set in amongst investors, with many of them saying "Cash is King" .

Undoubtedly cash plays a pivotal role. But what is important is to hold 'optimal' cash level - neither too much, nor too little. If you do that, it will serve to be a defensive stance when you feel the markets are over-valued and/or you have overbought, enable to pursue new investment opportunities that come your way, and ensure you have enough liquidity.

So, do not simply hold back on investing. After a sharp correction (seen over the last few months) in the Indian equity markets, you have a great value-buying opportunity - with attractive valuations and a decent margin of safety.

Take a calculated risk and consider allocating hard-earned money to equity as an asset-class (provided you have a high-risk appetite), plus hold some money in debt and gold under the current market conditions or even otherwise.

Image source:; photo created by jcomp

You see, not all asset classes move up or down at the same time. For example, while the Nifty 50 Index is still down around -20% on YTD (Year-To-Date) basis, gold and fixed income assets have generated positive returns during this time period. In other words, if your eggs are in different baskets (equity, debt, and gold), the risk can be mitigated. Asset allocation is the cornerstone of investing and intelligently crafted asset allocation and its timely review can serve as an investment strategy.

While setting and resetting the asset allocation between equity, debt and gold, ask yourself key questions such as...

  • What is my current age?

  • What is my income & expenses?

  • What are my assets & liabilities?

  • How much is the investable surplus I have?

  • What is my risk appetite?

  • What is my broader investment objective?

  • What are my financial goal/s? and

  • What is my investment time horizon before the financial goal/s befall?

Such a personalized approach would do far better than mirroring or copying the investment portfolio of friends, colleague, relatives, and/or next-door neighbour.

You can't rely on just one asset class-no matter how rewarding that might be historically. This could heighten investment risk. Instead, diversify tactfully and take enough care not to over-diversify either.

Furthermore, set realistic return expectations and don't get carried away by past returns. This is because past returns are no way indicative of future returns. When you assess returns, look at not just returns across time frames (6-months, 1-year, 2-year, 3-year, 5-year, etc.) but also across market phases (bulls and bears).

Being a novice, do not commit the mistake of going with brand names, how the big the company is, and Assets Under Management. The fiasco at Franklin Templeton Mutual Fund, the IL&FS episode, DHFL debacle, the crisis at Yes Bank, the bankruptcies of many of R-ADAG companies, have debunked the "Too Big to Fail" myth. They have let investors down terribly.

When you approach equities, prefer equity-oriented mutual funds. Going by the mutual fund route not only helps diversify optimally, but also allows access to professional fund management at a reasonable cost.

Having said that, be careful and choose mutual fund schemes that have displayed a consistently impeccable performance track record by holding a robust underlying portfolio. Evaluate a mutual fund scheme on a host of quantitative and qualitative parameters such as the following:

  • Returns over various time frames (6-months, 1-year, 2-year, 3-year, 5-year, 10-year, since inception);

  • Performance across market phases (i.e. bull and bear phases);

  • Risk ratios (Standard Deviation, Sharpe, Sortino, etc.) ;

  • The expense ratio of the scheme;

  • Portfolio characteristics (the top-10 holdings, top-5 sector exposure, how concentrated/diversified is the portfolio, the market capitalisation bias, the style of investing followed - value, growth, or blend, the portfolio turnover. In case of debt funds, the average maturity, modified duration, and the quality of debt papers);

  • The credentials of the fund management team (the experience of the fund manager, the number of schemes he/she manages, the track record of the mutual fund schemes under his/her watch, the experience of the research team);

  • And the overall efficiency of the mutual fund house in managing investors' hard-earned money (i.e. the proportion of AUM actually performing)

Besides, understand the investment philosophy, processes and systems at the mutual fund house are useful.

By analysing in this holistic manner, you will be able to gauge the risk-return potential of a fund, i.e. how it would perform in the future and choose the best schemes.

Under the current market scenario, prefer the 'Core & Satellite' approach to invest in equity-oriented mutual funds. This is a time-tested investment strategy followed by some of the most successful equity investors.

The 'Core' holdings should form a major portion (around 65-70%) of the mutual fund portfolio and ideally should consist of a Large-cap Fund, Multi-cap fund, and a Value Fund.

The rest, say around 35-40%, can be 'Satellite' holdings consisting of a Mid-cap Fund, Large & Mid-cap Fund and an Aggressive Hybrid Fund. If the investor is willing to take the risk, a small portion could be allocated to Small-cap Fund as well in the satellite holding.

The ultimate objective should be to diversify not just across market capitalisations but also investment styles, to gradually build wealth over the long run.

The six key benefits of the Core & Satellite approach are:

  1. Facilitates optimal diversification;

  2. Reduces the need for constant churning of the entire portfolio

  3. Reduces the risk to the portfolio;

  4. Enables to benefit from a variety of investment strategies;

  5. Aims to create wealth cushioning the downside; and

  6. Offers the potential to outperform the market

Given that the Indian equity markets are likely to be very volatile -- almost like a rollercoaster - and it could be a shrieking experience that tests your patience, it would make better sense to take the Systematic Investment Plan (SIP) route while investing in equity-oriented mutual funds. SIPs will help deal with market volatility without having to time the market (due to the inherent rupee-cost averaging feature of SIPs), instil the good habit of regular & systematic investing, will be lighter on the wallet, while you endeavour to compound your hard-earned money.

On the contrary, if you invest in a lump sum (all at one go) and the equity markets fall subsequently and the NAV of the scheme invested drops, wealth will be eroded. Maybe staggered lump sum investments can be considered.

To shield your portfolio and to address short-term goals as well as build an emergency fund (amidst the COVID-19 pandemic), consider parking some money in a pure Liquid Funds and/or Overnight Funds that do not have exposure to private issuers.

Choose schemes where the fund manager does not chase yields and predominantly holds government securities. Strictly avoid Credit Risk Funds, Corporate Bond Funds, and other debt mutual fund schemes with high exposure to private issuers and low-rated debt papers, since the credit risk now has amplified. Keep in mind, investing in debt mutual funds is not risk-free.

For steady and secure returns, choose among fixed income instruments such as a bank Fixed Deposit and certain Small Saving Schemes.

Hold some amount tactically in gold. As the economic uncertainty remains elevated across the globe and central banks continue to expand their balance sheets keeping the interest rates low and maintaining an accommodative monetary policy to address economic growth concerns, gold is likely to display its lustre and the spotlight will be on gold. Hence, consider allocating around 10-15% of the entire investment portfolio to gold - preferably via Gold ETFs and Gold Saving Funds - and hold with longer investment time horizon, say 10 years. The precious yellow metal has displayed its trait of being an effective portfolio diversifier, a hedge (when other asset classes have failed to post alluring returns), and commands a store of value in these uncertain times.

Once you create your portfolio as detailed above, ensure that it works for you under all market conditions. A comprehensive portfolio review is the key. It helps you:

  • Reset asset allocation

  • Re-align the investments as per your risk profile, investment objective, envisioned financial goals, and the time in hand to achieve those goals

  • Cull out underperforming and unsuitable investment avenues

  • Replace and restructure your investments astutely with deserving and suitable avenues

  • And ensure that you are on track to accomplish the envisioned financial goals

If you invest in line with your risk appetite and financial goals and chalk out a personalised asset allocation plan based on the facets discussed above, you will end up building a SOLID investment portfolio.

Volatile and uncertain market conditions can fetch you respectable returns, provided you perceive the situation sensibly and devise an efficient strategy that can reap investment success.

So, go ahead and keep investing.

If you wish to invest in a readymade portfolio of top recommended equity mutual funds based on the 'Core & Satellite' approach to investing, I recommend that you subscribe to PersonalFN's Premium Report, "The Strategic Funds Portfolio For 2025 (2020 Edition)".

This premium report will help you build your optimum mutual funds portfolio for 2025 without any effort on your part. If you haven't subscribed yet, do it now!

Happy Investing!


Warm Regards,
Rounaq Neroy
Editor,Daily Wealth Letter


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