Call it the corona scare or a speculative feast, equity and debt markets have been swinging wildly, scaring even seasoned investors. Most small retail investors have lost their gains and are staring skywards to save their principal investment. First-time mutual fund investors are a confused lot. BusinessLine spoke to A Balasubramanian, a mutual fund veteran and Managing Director and CEO, Aditya Birla Sun Life AMC, on what lies ahead for investors. Excerpts:

Do you think the sharp fall in equity markets will scare investors and make them change strategy?

The equity market fall across the globe arising from coronavirus-related issues, and its potential impact and slowdown in the economy, have shaken capital market investors. While no doubt the value drop across equity portfolios is quite drastic, investors should also understand these are exceptional scenarios. One has to tide over this tough time and stay calm with the existing portfolio. We have been advising all investors for the last two or three years to keep a high focus on asset allocation between fixed income and equity in order to weather these kinds of turbulent times and also build a long-term portfolio with a good mix of equity and debt mutual funds.

Given the current domestic and global uncertainty, do you see a further fall?

The market has already fallen close to 50 per cent from the peak and, in general, such a sharp fall does not come at the speed at which the fall has come this time. Such a sharp fall in one month is unprecedented and was never seen in the past. Having said that, one has to also accept the fact that the market is completely getting reset to the ensuing slowdown in the global economy including India. One would need more time to assess the real impact of this on various companies and sectors. On the basis of these assumptions, there seems to be limited scope for the market to fall further.

When do you see a turnaround in markets?

With the recent lock-down announcement, we need to reset the expectation on quarterly earnings slippages for the next one or two quarters. In the meantime, the government has promised to take steps to boost confidence through fiscal stimuli and a few market-friendly tax measures. At the same time, the RBI will recognise the ongoing pandemic challenge to favourably consider banks’ provisioning norms, providing more liquidity to keep the interest rate low and also cut interest rate further. All such announcements in the coming days should, ideally speaking, provide necessary support to the market and bring back participants gradually. Though it might not be fair to expect a quick turnaround in the economy given the large impact of Covid-19 across the board.

The mutual fund industry was high on cash in February. Did it see the crisis coming in advance? Did it book profits?

I presume most of the money managers remained fully invested with the cash component in the range of 5-7 per cent. If at all any fund manager had a higher cash component in the portfolio, that would have been purely on the basis of inflows that the fund house or the scheme had during that period. Such flows are mostly kept in cash given the continuous fall in the market.

Not just equity, even the value of debt funds has been eroded. Why did this happen?

Debt funds have seen yields going up in the shorter end of the curve due to financial year-end considerations as well as lack of buying from non-mutual fund investors. While the liquidity is good and the RBI has been pumping in liquidity through long-term repo, the absence of buying has resulted in yields going up from three months commercial papers to 10-year bonds. Such a swing in yields has resulted in negative returns from debt funds. One should not worry about this. As we get into April, bond yields generally retrace to lower levels as long as liquidity remains easy.

When do you think it will bounce back?

The RBI has been constantly providing support to the bond market by injecting liquidity. More, of course, will come from the RBI in the form of a rate cut. Once we cross the March year-end pressure, debt funds should come back to normal. On the contrary, one should consider investing in debt funds at the current juncture.

Can investors consider gold and passive funds?

Passive funds, of course, are now becoming part of the asset allocation of investors. Given the huge swing in the market, especially in sectors that are overweight in the index, passive funds too would go through a similar swing — as it happened with ETF funds recently. Keeping this in mind, in the current market environment, investors should have a good mix of actively managed equity funds (large and multi-cap), debt funds (low duration funds, corporate bond funds and banking & PSU debt funds), and index or ETF funds.

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