Bear Market Blues: Should you hold, sell, or buy more equity mutual funds now?

The Nifty has corrected 10% from its highs and some more dip might be in the anvil. Individual investors most of whose money is in equity funds are a worried lot. This is immensely true, particularly in the case of investors who have started in the last 2-3 years. These post Covid years witnessed a huge number of investors venturing into equity funds who have almost seen a one-way up move in these years.

After March 2020 , the first time the Nifty fell over 5% in a month was in October 2024. Investors who have seen their investments going only upwards have seen their investment value dropping for over 45 days now and could get restless.

To educate them on how to approach their investments in this market condition, here are some do's and don't for them to follow. As it's more important to know the don'ts first, they come first.

DON'Ts

• No knee-jerk reaction and no panic selling panic sellers later get in room as timing the re-entry perfectly is almost impossible.
• Don’t treat investment in equity funds with a trading approach redeeming in short duration or switching to liquid funds
• Don’t deploy all the fresh surplus you have into equity funds on a single day to utilise the correction
• Don’t form the opinion that staying away from the market in the downturns means you will make the best of the market returns
• Don’t stop your SIP investments fearing the fall. SIP instalments happening in falling markets are beneficiaries of the downturn.
• Don’t tinker with your asset allocation for any reason including during market corrections by exiting equities to move to other asset classes
• Don’t get overconfident that you will be able to perfectly time exits and entries into equity funds to utilise the market opportunity to the fullest. Most of the investors who have attempted timing have not compounded wealth as much as those who have stayed with the market across cycles.
• Don’t judge schemes just by their short-term performance during this correction phase. Long term track record is what really matters as any fund can have tough short-terms.

DOs

• If you have investible surplus, deploy it in a phased manner into equity funds through Systematic Transfer Plan (STP) after parking in overnight/liquid funds over the next 10 to 12 weeks.
• For fresh deployment into equity funds choose largecap heavy funds in categories like flexicap or largecap funds as largecap funds are favourable in valuation now and have corrected relatively more in this fall. Proven schemes that have a higher cash position like Parag Parikh Flexicap Fund which is sitting on 20% cash will be able to capitalise on the downturn better and such funds will be ideal for fresh deployment now.
• If you are an investor who has taken the dip into equity funds in the recent 2 to 3 years and a correction of this quantum is not digestible, then pure equity funds are not for you. That said, though equity funds can experience such dips in the interim, over the long term of 5 years or more they can cover up to deliver decent double-digit returns. The recent years have seen the birth of many DIY investors who have been investing without advice online seeing the high returns in the recent years and these investors now need to review their risk appetite. If you are an inexperienced investor who has been investing without expert guidance, it's time you hire the services of one, assess your risk profile and get your portfolio distributed to align with your risk profile.
• Those investors who find them to be a misfit to tummy the risk of pure equity funds, can move to dynamic hybrid funds like Balanced Advantage Funds or Multi Asset Funds which take opportunistic exposure into equities based on market valuations, while the rest of the investment is in arbitrage opportunities, debt and commodities.
• Those who have been over invested in equities need to move the excess allocation to the asset classes where there is a gap in allocation.
• There have been many investors who have over-allocated to sectoral and thematic funds recently, which have delivered good returns in the recent years and many of those categories have lost steam. It's necessary now for such excess- allocations to be moved to diversified funds. Thematic and Sectoral Funds are not suitable for small investors.
• Based on the high returns of the recent past, some investors have been doing SWP (Systematic Withdrawal Plan) at a high rate expecting the past returns to be repeated. Such investors may see their capital bucket leaking and they may have to stop withdrawals for a while and resume withdrawal after the markets stabilise at reasonable rates of 6 to 7%.

Conclusion

Such market downturns call for intense review of your portfolio and to reassess your risk appetite. Don’t heed the negative noises as long as you have the right choice of schemes. Markets are bound to bounce back once valuations consolidate to fair levels, corporate earnings improve and FIIs start buying.

Gauging your risk profile through professional advice and the right understanding of the market risk is very important to ensure appropriate asset allocation and to stay calm and unwavering with patience to create great wealth over the long term.

For effective wealth creation through a high rate of compounding, there are no better options than equity-oriented investments like equity mutual funds.

V. Krishna Dassan is Director, Dhanavruksha Financial Services Pvt. Ltd.