You need not be especially blessed to ride over market volatility and inflation. Naveen Kukreja, CEO & Co-founder, Paisabazaar.com explains to Abeer Ray how a simple understanding of how some funds work, the need to stay invested despite market pitfalls and the right allocation of funds depending on your financial goals will help you survive the market movement.
Q. In this age of volatility, what is your advice to the investors to survive the market?
Investors should stay invested in their existing equity mutual funds, irrespective of the market phases, as long as those mutual fund investments are in line with their financial goals and their risk appetite. They should also continue with their existing equity fund SIPs as bearish market phases provide favourable entry points for the investors. Investors should always remember that bear market phases are not permanent and you have to take stock level decisions as an investor. If you are in mutual funds, redeeming equity mutual funds or pausing SIPs during bearish market phases is not advisable for the reason mentioned above.
However, investors should note that bearish market phases could last longer than market corrections. Thus, investors planning to top up their existing SIPs with fresh lump sum investments should be ready to hold their investments for a longer period. They should avoid using their emergency fund or investments parked in fixed income instruments for their short-term finances for topping up their equity fund SIPs.
Q. Some analysts recommend investing in balanced advantage funds to get over recurring market turmoil. Do you suggest a shift in investments from equity funds to balanced advantage funds?
Balanced Advantage Funds, also known as Dynamic Asset Allocation Funds, are free to manage their equity and debt exposure without any maximum and minimum exposure limits set by the SEBI. These funds use in-house proprietary models to change their equity and debt exposures based on changing equity valuations. One of the main objectives of these funds is to reduce the downside risk for their investors. These funds do not seek to outperform pure equity funds over the long term or eliminate the downside risk posed by bearish markets. Hence, investors having a moderate risk appetite and preferring dynamic asset allocation for their investment strategy should opt for balanced advantage funds. Investors looking to beat broader markets should stick to pure equity mutual funds.
As balanced advantage funds can maintain significant exposure to debt instruments, investors should also check the investment strategies of balanced advantage funds regarding the credit quality and maturity profile of their debt portfolios.
Q. Midcap and flexicap funds have outperformed large-cap funds this year. Considering how the market is to such an extent affected by macro factors, would it be wrong to assume that most investments in the future would be in flexicap mutual funds?
Flexicap mutual funds are free to change their exposures to large-cap, mid-cap and small-cap stocks across all sectors and segments, without any SEBI-imposed market capitalisation restrictions. However, these funds have to maintain an equity exposure of at least 65 per cent. The freedom of dynamic allocation allows these funds to tap opportunities across market capitalisation and segments/sectors, based on their market outlook. As mid-cap and small-cap funds usually have higher downside risk during bearish market conditions, investors having a moderate risk appetite and wishing to invest across market capitalisation with a dynamic allocation strategy should opt for flexicap funds.
Q. Short-term debt funds are becoming more relevant owing to the rise in interest rates. How much percentage of their money should investors allocate to these funds?
Short-term debt funds are best suited for parking one’s short-term surpluses, emergency funds and investments made for short term financial goals. The shorter maturity profiles of these funds enable them to offer higher downside risk protection than other debt funds during rising interest rate regimes.
However, the steep rise in bond yields and the policy actions announced by major central banks would not eliminate the drawdown risk for the short-term funds. As the policy rates are expected to increase for some time, I would suggest investors to rather park their short-term surpluses in high yield bank fixed deposits (FDs) during the current rising interest rate regime. Some of the banks offering higher FD yields include SBM Bank and small finance banks like AU Bank, Jana Bank, Suryoday Bank, Equitas Bank, etc. Investors can shift to short-term debt funds once the FD rate hikes by these banks start to peak.