The Hindu Business Line : Volatility is generally handled well by fund managers

Equity fund investors are in a fix right now. The latest ups and downs have chipped off some of their wealth. Should they allocate more at this stage to bring down their average cost of investment? Or should they wait for the worst to get over?

Mr Swaminathan, Associate V-P & National Head - MFs, IDBI Capital Market Services, has some clues.

Excerpt:

Equity investors have seen some wealth erosion in recent days. How should they behave now?

Yes, the equity market was volatile and down in terms of sentiments, leading to price corrections. While the sharp moves may well be a fall out of several factors, the resultant downswing in stocks may push traders to follow suit, irrespective of their positions both in cash and derivatives.

As for equity fund investors, their allocations are supposed to have been based on a well-planned strategy, supported by a proper financial goal. The market volatility is generally being handled well by fund managers. Hence investors should stay invested. Remember, shifting between assets should take place only after a proper review of the existing portfolio and a study of the alternatives.

How should debt investors position themselves in these circumstances?

The strategy to invest in equity is totally different from debt from the point of risk-returns expectations. The expectations of a tightening market, along with increased bias for rate hikes, do not portray a good case for shifting investments at this juncture.

Investors may use liquid funds only as a parking lot before money is put into use for consumption or further investment. Instead of shifting to debt funds straightaway, a review of equity portfolios and fund performance will be necessary.

In case equity fund investors do stay put, what sort of risks are they likely to face in the coming days?

A volatile market adds to risk, with prices moving erratically in either direction. This actually creates opportunities: you may consider an addition to your existing holding or a diversification into other equity funds. In such turbulent times, the measure of volatility - standard deviation - tends to be high. There can be any number of reasons for volatility. It may be a certain policy initiative, movements in other equity and non-equity markets, heavy selling by panicky investors.

How should asset allocation be done in the days ahead?

Given the decline in the indices, this is the time for investors to consider a stock-selection approach. Mind you, asset allocation invariably changes with age, financial profile and risk tolerance level. If you measure success in terms of achievement of long-term financial goals, the current decline should not deter you. This is also the time for diversification and averaging out of costs of investments. One may increase weightage to equities, subject to the prevailing asset allocation strategy.

How do you expect MF distributors to behave in such a scenario?

As financial advisors of individual investors, distributors carry the responsibility of providing solutions that suit their clients' requirement. In such turbulent times, they should adopt a handholding stand. The idea is to disseminate correct information and urge clients to review their portfolios without any bias.

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