5 options for mutual fund investors to maximise gains & minimise risks right now

The COVID-19 pandemic has been a big blow for the Indian economy and the country’s corporate sector. Its impact was clearly visible in the Gross Domestic Product (GDP) numbers and corporate revenues and profits for the June 2020 quarter. The economic hardship unleashed by Coronavirus has been nothing less than a financial nightmare. The mutual fund investors, however, escaped after a brief shock in the last two weeks of March this year. The reason is a swift V-shape recovery in the equity market in the last five months.

The benchmark National Stock Exchange Nifty 50 Index is up 54 percent from its March 23 lows and the index is now in the green zone on a 12 months basis. To put it differently, the index has now recouped 82 percent of its losses between January highs and March lows. This is one the fastest recovery in the broader equity market ever.

This has translated into an equally swift recovery in the net asset value (NAV) of equity mutual fund units that has turned red in the months of March and April and had threatened to wipe out most of the gains of the last five years.

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Mutual fund investors can now breathe easy. The NAV of most diversified equity funds are back in the positive territory on a 1-year, 3-year and 5-year basis. The market movement has however become placid and the index has hardly gone anywhere in the last one month. There is a growing chorus among analysts that stock prices are out of sync with the economy and corporate fundamentals.

So what should you do if you are a mutual fund investor? Should you cash out and redeem your units at the current levels or should you wait given the bullish sentiment on the street? Here are some options for you:

1. There are two ways to approach the question of redemption. First look at your risk appetite. If you are risk averse either because you hate to lose money or cannot afford to lose money as the MF units represent a major part of your savings then it is the right time to cash out. The market has recouped most of the COVID-19 losses but stock prices remain volatile and the market is now 15 percent more expensive than its pre-COVID valuations. This raises downside risk for conservative investors.

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2. If you can afford to wait, then compare the returns that the unit is delivering at the current NAV with the objective with which you had invested in the first place. For example, if you had invested in the equity mutual fund to get higher returns than one offered by fixed income instruments such as bank FDs, then see how much gains you have made so far. If at the current level you have been able to beat FDs by a reasonable margin then I will again suggest you to cash out at the current levels.

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3. But you may ask: “What if I can afford to stay invested regardless of the market movement over the next few quarters? Well then there is some homework for you. Take out the fact sheet of your mutual fund units and study its portfolio. The MF unit is as good or bad as the stocks in which it has invested. If you are comfortable with the investment portfolio of your MF unit then stay invested.

If you are not happy and sense that a different investment portfolio may yield better results than use the current market to switch to a different MF unit. I am saying this because the recovery has been very polarised with most of the gains led by a few stocks. So it's time to have a second look at the stocks and mutual funds that have underperformed so far. If the market sentiment remains bullish there is a strong possibility of the cheer spreading to beaten down corners of the market. Given this it makes sense to de-risk your portfolio by moving at least some of the money to these value stocks or funds.

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4. The third option is especially important for investors who invest in thematic or sectoral funds such as pharma funds, technology funds or consumption funds. The last six months have been nothing less than stellar for gold, pharma, healthcare and technology investors. For example, DSP Healthcare Fund is the top performer among funds with 64 percent returns in the last one year. It is followed by Mirae Asset Healthcare Fund that has given 58 percent while ICICI Prudential Pharma Healthcare & Diagnostics Fund has given 56 percent return during the period. In the exchange traded fund (ETF) category, Motilal Oswal Nasdaq 100 ETF topped the chart with 60 per cent returns in the last 12-months. Gold ETFs have also given outsize returns this year.

But you should know that these are abnormal returns and won’t be repeated for the next few years. So as a matter of prudence you should book profits in these funds, if not fully than at least half of it. Invest the proceeds in beaten down sectors such as banking or multi-cap funds.

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5. Lastly, consider taking exposure in an ETF as it has become increasingly tough for actively managed diversified equity funds to beat the benchmark indices. This is because few stocks are now driving the market, making it tough for fund managers to generate excess returns through diversification. Besides, the expense ratio of ETFs is a fraction of the actively managed funds. This means that you can end-up making more money in an ETF net of expense ratio even if the headline returns are lower than those in the actively managed diversified funds. 

(Karan Deo Sharma is a Mumbai-based finance and equity markets specialist).

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