How can mutual fund investors cope with the current market situation?

Covid-19 fears continue to bog down markets and economies across the globe. Over the past month, broader Indian market indices, the Nifty 50 TRI and the Nifty midcap 100 TRI, plummeted 25 per cent and 32 per cent, respectively. This has led to a significant drop in the NAV of equity-oriented mutual funds.

SIP (systematic investment plan) investments in large-cap funds over the last one, three, five and seven years have registered a subdued annualised returns (XIRR) of -35, -12.5, -4 and 1.5 per cent, respectively. The picture is bleaker in the mid- and small-cap categories (see graph). Returns on SIPs in midcap funds, on average, dropped to -35, -16, -6 and 3 per cent, respectively, while that in small-cap funds clocked -41, -23, -10 and -0.6 per cent, respectively.

Don’t panic

Retail investors tend to get spooked by such a sharp downside and tend to stop their SIPs or even head towards the exit.

However, experts advise that this is a bad idea.

Nimesh Chandan, Head, Investments (Equities), Canara Robeco Mutual Fund, says: “Investors should stay calm. Every few years, markets experience sharp corrections and volatility on the downside. Taking investment decisions when one is overrun by fear is seldom helpful. Market crashes are raw material or opportunity that an investor can use for successful investing. The investor will need to have patience and a long-term investment horizon to realise the benefits of investing during these times.

“Downturns in the stock market are not a time to cut investments but to cut expenses and possibly start one more SIP. SIPs take advantage of market volatility.

“Stopping SIPs during these times will mean one turns the primary advantage of this systematic investment into disadvantage,” Chandan adds.

A BusinessLine analysis on the performance of SIP in equity-oriented funds during market corrections and immediately after the correction corroborates these views.

We analysed returns of three-year SIPs that ended at the lowest point in each market correction, over the last 12 years. Six bear phases were identified for the analysis.

Further, we tried to see the returns an investor would have got had he continued the SIP for another six months following the market bottom.

The analysis shows that SIPs that were terminated at the market bottom delivered negative or low returns. But the SIPs that were continued for the next six months clocked significantly superior returns.

Superior returns

For instance, a three-year SIP in large-cap funds that was redeemed at the market bottom at March 2009 delivered a return of -24 per cent. But the SIP continued for another six months, till September 2009, delivered a return of 13 per cent. Similarly, a three-year SIP redeemed at the market bottom of October 2018 delivered only 3 per cent returns while the extended SIP yielded 10 per cent.

The analysis clearly shows that investors should not panic over near-term gyrations. Continuing the SIP in downturns will help accumulate more units, resulting in rupee cost averaging. This will end up yielding higher returns once the market moves up.

S Naren, ED & CIO, ICICI Prudential AMC, believes that “going forward, depending on the news flow related to coronavirus, markets will recover. However, short-term volatility is likely to prevail. In such a situation for an existing investor it is important to continue with one’s investment through SIP. In fact, now is the time to top-up one’s investment such that one can accumulate more units. An investor with at least a five-year investor horizon is likely to make outsized gains from Indian equities.”

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