The burning questions: Addressing the dilemma

All was going well for Indian Markets until early March 2020, while the broader indices like Nifty 50 and Sensex were making new highs in last 18-24 months, beginning September 2019 until early March’20 the rally started to extend beyond top 15-20 stocks on to a lot of quality midcap and small-cap companies as well. This was all backed by very strong inflows from FII and relatively steady positive flows from DIIs too.

And then came Corona/ COVID-19! As the spread of the virus started to build, global markets started to correct violently with almost all major global indices correcting in the range of 35-40%. Indian markets too corrected very sharply and rather quickly with continuous selling from FIIs on a daily basis to the extent of 3000-4000 cr. Trillions of dollars of wealth have been eroded globally so far and any bottoming out of the markets is becoming very difficult to predict. It is quite likely that till such time news around any positive developments emerges on the further spread of COVID-19, the markets will remain extremely volatile and could swing 5-10% either side on a daily basis.

Once every 10 years, markets do go through massive corrections and we have seen this in 2008 (Global Financial Crisis), but in long terms markets are all about fundamentals and delivers returns in line with the earnings of the companies. Also, after a period of excessive corrections, there are periods of quick recoveries as well which again has been seen in the past on various occasions.

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But we were pleasantly surprised to see the maturity of investors especially the retail investors, who are not discussing the extent of correction or their portfolio values going eroding drastically.

There is a different dilemma on the investors’ minds.

What could be the maximum possible correction at worst?

It is very difficult for anyone to predict the absolute bottom, especially in current conditions till such time the on-going issues come in control of countries which are most impacted, markets would continue to be volatile and in correcting mode. Having said so, we do feel that the correction is ‘done too much too soon’ due to rapid selling by FII’s and with very low volumes, and from here the pace of correction may not be too much, but you can never rule out 5-10% correction still in coming weeks. So, what we need to do is 1. Not get impacted looking at notional losses in our portfolios and simply SIT TIGHT at this point in time, and 2. If comfortable do try and add more money in equities to take advantage of the ongoing volatility.

Should we start to allocate money in equities now?

The famous anecdote in equity investing is to ‘BUY LOW’ and ‘SELL HIGH’ – meaning buy on dips and reduce the cost of acquisition of equities, this will ensure guaranteed wealth creation in the future. It’s the nature of markets to be volatile and we need to treat volatility as a friend than then foe. CASH is KING, some portion of your wealth should always be in cash all the time, so that whenever there are significant corrections in markets, you may buy more. It’s a buyer’s market and if you have cash and courage then this is TIME to start allocating to equities.

Should one put the money all in ONE GO or through SIP/ STP? Should SIP/ STP be done in two to three months or one year and more?

It is always advisable to stagger the investment in the current situation may be on a weekly basis than a monthly basis. SIP’s work the best when you get opportunities to see your installments getting bought at lower prices resulting in the accumulation of more numbers of units which would have a significant payoff in the long term.

If you were buying only on rising prices then the averaging would only higher and in times of corrections your portfolio will have higher relative underperformance. To avoid this, we need to ensure existing SIP’s continue, and new SIP’s are initiated TODAY than Tomorrow. ‘Time to BUY is NOW’.

Should we buy into large caps or midcaps or Multi caps?

Companies across all market-caps make money; timing large caps or midcaps could be a futile exercise. It is always advisable to have a portfolio with a mix of large, mid and small-cap companies that are of topmost quality with high levels of sustainable growth. Thus, it would make sense to invest in multi-cap or large and midcap category funds. This will ensure you have the best of both the world and be absolved with the mystery and challenge of trying to time the bottoms. Also, data suggests that the volatility measured by standard deviations is much lower as compared to pure large or mid-cap oriented funds, that way you will make superior risk-adjusted returns in the long run.

Would invest in Dynamic or Asset allocation funds make sense?

The answers lie in the valuations of markets, as markets go up the valuations get premium and as it goes down the valuation goes in discount. Obviously, it is always better to buy when valuations are low when markets have corrected. That is the time to increase equity allocations. Investors in such a dilemma have the option to look at Dynamic or balance advantage category funds which use various valuation matrices to arrive at understanding how expensive or cheap the market is and determine appropriate allocations between equities and debt. For example, in current markets, valuations are getting discounted suggesting increasing the exposure to equities gradually. Similarly, as markets will go up the allocation to equities will reduce. So the Buy Low and Sell High fundamental works best in this category of funds.

I have tried to address some of the burning questions investors may have with some ideas for one to consider while evaluating his/her existing portfolios or making fresh allocations.

(The writer is Associate Director and Head of Sales and Distribution, Motilal Oswal AMC)