The Hindu Business Line : Adopt risk management strategies in volatile market

ARE you an investor trying to pull out of equity funds, scared that the stock market will go down further? Don't consider yourself too lonely because lots of others are trying to do just that.

Fear has again overtaken greed in the world of mutual funds, a sentiment that is driving people to exit or at least preventing them from putting in fresh money.

Consider the trends noticed during the last few weeks. Liquid funds and floating rate schemes are walking away with large inflows, investors are by and large ignoring other categories of funds and overall returns are generally not satisfactory. Even the performance delivered by monthly income plans, schemes that were being sold very aggressively till recently, is poor.

This situation, fund circles indicate, may well continue for some more time, at least till the presentation of the Budget. A section of investors is likely to hold on to their portfolios till a clear direction emerges. Another section may feel the urge of moving their capital to safer destinations. At any rate, a few good risk management strategies may be worth considering at this juncture.

The worse thing is that even debt is not performing the way you would like it to. And given the conditions of the market, fund managers handling pure debt schemes may yet find it tough to make a significant difference. With both equity and debt doing poorly, the investor is left with fewer options.

That takes us right into the various short-term choices that mutual funds offer, ones that are currently being used as temporary parking spaces by many investors. A number of competing products are available in the market and one has to be careful about choosing the most appropriate ones.

Anybody weighing these schemes (especially the liquid products) on the basis of their asset bases should remember that their assets are very flighty. They continue to rise and fall, and no one ever gives a serious thought to it.

In case you are interested in numbers, liquid funds provided 0.36 per cent for the one-month period ended June 18 (according to Value Research), while floating rate schemes did a notch better at 0.37 per cent. In comparison, many other categories of funds, including diversified equity funds and MIPs, were in the negative terrain.

If you are an earnest investor in equity funds, brave enough to stay put for the medium-to-long term, don't panic unnecessarily. Remain committed, at least partially, for the next upside.

A change in asset allocation practices or an otherwise cautious approach, however, may not harm your interest. Not when the stock market is so volatile (with concurrent impact on NAVs of equity funds) and sentiments are weakening.

A strategy aimed at preserving capital may be necessary in a bleak scenario. An investor who stops his capital from getting eroded is doing a great service to himself!

On the IPO front, it seems that there will be a break of sorts although a few fund houses are expected to moot new proposals. Many of these will be on the equity side as most players already offer a wide range of debt products. The market could do with more innovative equity offerings, especially if they are focused on themes and sectors.

Feedback may be sent to blcal@vsnl.net

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