Mutual Fund Investing: Three Strategies for Mutual Fund Investors in a Volatile Market

What does the Omicron spread mean for mutual fund investors? In one line, that means: “More short-term volatility in your equity mutual fund portfolio.”

This time, central banks do not have the option of supporting the economy with stimulus measures such as rate cuts. Nor will governments be willing to stretch their finances by providing fiscal stimulus. Even if the probability of the worst-case scenario in terms of the spread of the Omicron virus is less, the central and state governments would not want to take any risks, having burned their fingers earlier. Therefore, as a simple precautionary measure, they would not waive large-scale closures, travel bans and restrictions that may impact economic activities. Regardless of whether the spread of Covid is severe, moderate or transient noise, financial markets do not like such uncertainty and it will cause short-term volatility in financial markets.

If you juxtapose the current scenario to March 2020, defensive sectors like IT and Pharmaceuticals will do well, which will be reflected in the performance of these thematic funds. Funds geared towards large-cap quality names may be better off as there may be a relative flight to safety.

Should investors be nervous or reduce their position in equity funds?

Investors should understand that equity investments are volatile and should maintain a long-term horizon when it comes to equity investments as an asset class. We normally recommend that at any given time only money that you don’t need at least for the next 5 years can go into your long-term equity wealth building portfolio so you don’t get disturbed by such short-term investments. market fluctuations. These investors must continue to hold their investments. With massive fiscal and monetary economic stimulus, we are heading for a strong economic recovery followed by a phase of strong growth, as evidenced by several high-frequency economic indicators. So, barring short-term volatility, the long-term outlook looks promising.

Moreover, the markets have already corrected and valuations have returned to more reasonable levels. We are still about 4% below the all-time high after the correction. So, in fact, this is a good opportunity for investors who have been waiting on the sidelines to take advantage of this volatility and build or increase their long-term equity portfolio at lower levels.

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


1) Systematic Investment Plan (SIP): Due to the rupee cost averaging, in a SIP you end up buying more units when the markets are down and fewer units when the markets are up. Thus, these periods of volatility help your SIP investments reduce your average cost of ownership and are an ideal way to invest in such an uncertain scenario where it is difficult to predict short-term ups, downs and market directions.

2) Systematic transfer plans: People with lump sum cash to invest can create a synthetic SIP by making lump sum investments in liquid funds and setting up a weekly/bi-weekly or monthly transfer plan to equity funds. The idea is to invest in equity funds in a laddered manner and allow the average cost in rupees to work to your advantage.

3) Asset Allocators and Balance Advantage Funds: These funds invest in a combination of assets such as stocks, debt and, in some cases, gold. If the stock markets fall, the proportion of equity holdings in the fund’s portfolio will decrease, and then when the fund manager rebalances his portfolio, he will partly shift from debt to equity, thereby buying equity investments at lower prices. Basically, “Buy low, sell high” is automatically built into such investments, which works well in volatile markets.

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

Dolores W. Simon