COVID-19 has once again sent the equity market into a tizzy. On Friday, November 26, the S&P BSE Sensex tanked by nearly 1,700 points as South Africa reported detection of a new COVID-19 variant that is spreading fast in various countries. This created panic among investors leading to a global sell-off in the equity market, including India. Consequently, equity mutual funds witnessed a sharp drop in daily returns.

Why has the new COVID-19 variant created panic among investors?

The new COVID-19 variant named as Omicron has been classified as a ‘variant of concern’ by the World Health Organisation (WHO). According to WHO, “Omicron has an unprecedented number of spike mutations, some of which are concerning for their potential impact on the trajectory of the pandemic. The overall global risk related to the new variant … is assessed as very high.”

Reports suggest that the new strain has about 30 mutations and could, therefore, hold the potential to escape immunity produced by vaccines and previous infections. This has raised concerns that Omicron could be more dangerous than Delta, the variant that caused the deadly second wave of pandemic in India and other countries.

While experts are still assessing if Omicron is more transmissible and/or dangerous than other variants, Mr Stephane Bancel, CEO of Moderna, recently stated that the vaccines are likely to be less effective against the Omicron variant. He further stated that it will take months to clear a new vaccine targeting Omicron.

If the Omicron variant wreaks havoc, the existing vaccines prove to be less effective, and we see resurgence of infections, that could lead to higher hospitalisation and death rate. It will also mean renewed curbs on the movement of goods and people. This could prove to be setback for the economy that has just begun to take steps towards normalcy.

Graph: Omicron spooks equity investors

Graph 1

Data as on November 26, 2021
(Source: ACE MF) 

Since the reports of this new COVID-19 variant, a number of countries, such as UK, Australia, USA, UAE, Canada, and Japan, have suspended entry of travellers from African countries. India too has ordered more rigorous screening and testing of travellers arriving from South Africa, Botswana, and Hong Kong where the new variant is spreading rapidly.

Apart from the pandemic, fears about rising inflationary trends, which could slow down the revival of demand that is necessary for the economy to transcend this COVID-induced blow, has made investors wary. The signalling of the stimulus tapering and hike in interest rate by US Federal Reserve have also led to concerns of liquidity declining that could deter growth in the equity market. Besides, the resurgence of COVID-19 in major economies of Europe such as Germany and Austria and resultant lockdowns have dampened investors’ sentiment.

Consequently, since the beginning of October 2021, Foreign Institutional Investors (FIIs) have net sold Indian equities to the tune of Rs 15,851 crore, thus exerting pressure on the market.

Should you redeem your equity mutual fund investments?

Many stocks across market caps are still trading at expensive valuations despite the recent correction. Renewed concerns about the pandemic, expensive valuations, inflation risk, and any spike in bond yields will keep equity markets volatile in India and globally. It would not be surprising if the market corrects further by around 5% – 10% from the current levels.

Though the market has recouped some losses in the last couple of days, it was mostly led by a few select heavyweight stocks while the overall market remained volatile. The one-way market rally we have seen in the last one and a half years cannot continue forever and, therefore, equity mutual fund investors should tread carefully.

However, this does not warrant liquidating your equity mutual fund holdings. You should consider redeeming your equity mutual funds only in the following circumstances:

  • You have met your financial goal
  • In case of a financial emergency, after utilising the emergency fund
  • Your risk profile has altered and no longer aligns with that of the mutual fund scheme
  • The fundamental attributes of a scheme have changed, which may not be suitable for you
  • Your investment objective has changed since you first invested
  • The scheme has been a consistent underperformer vis-a-vis its benchmark and most peers
  • Your asset allocation review warrants rebalancing of the portfolio

What should equity mutual fund investors do?

1) Stick to your asset allocation

Generally, investors’ risk profile with respect to equity investment often tends to fluctuate driven by market conditions. A market rally can tempt you to assume higher risk, while volatile market conditions can make you rethink your decision. However, if you invest as per your personalised asset allocation plan and stick to it, you will be in a much better place to deal with market fluctuations.

Ideally, you should diversify your assets across equity, debt, and gold asset classes as well as the sub-categories within those classes. Decide the weight in each of these asset classes after assessing your risk profile, investment objective, and time horizon to goal. This will help you safeguard your investments when a particular asset class underperforms.

The long term growth prospect of the Indian equity market is expected to be positive, even though we may see intense volatility in the short term. So, if you have a long-term investment horizon of at least 3-5 years, you can continue with your investment in equity mutual funds. Moreover, you can use any significant correction in the market as an opportunity to increase exposure in equity mutual funds. But remember to avoid risky assets such as Mid-cap Funds and Small-cap Funds if your investment horizon is less than 5 years.

[Read: How to Earn Respectable Alpha by Creating a Suitable Equity Mutual Fund Portfolio]

2) Invest regularly

Investing regularly via SIP is the best strategy to mitigate the impact of market volatility and let your wealth grow through the power of compounding. If the market corrects further, more units of mutual funds will be allotted to you, and when the market ascends again, it will result in higher returns.

Note that the equity market witnesses various events throughout the year. Most of these events do not have any long-term impact on the indices. Therefore, it is important to invest regularly till you achieve your goals.

Discontinuing your SIP investments due to market noise and volatility can derail your path to achieving your financial goals. You see, volatility is the very nature of the equity market. It is how we use it to our advantage, perceive the situation sensibly, rise above the market noise, and devise an unbiased efficient strategy which will decide our investment success.

3) Avoid timing the market

Time in the market is more important than timing in the market. During volatile markets, investors tend to make financial decisions by trying to time the market. But the fact is, no one can accurately forecast the market movement. This is because economic, political, social, and other factors that affect the stock market are highly unpredictable. Markets may continue to rise even if it is overvalued, and/or it could prolong its fall even after huge corrections.

Instead, of timing the market, invest in equity mutual funds that have a track record of performing consistently well across market phases and cycles compared to its peers and the benchmark. Additionally, assess whether the fund while generating higher returns keeps the risk level under check. Also ensure that the fund house has a robust investment process and adequate risk management system in place.

To conclude

Reacting to market behaviour and the herd can lead to unnecessary stress and you may end up deviating from your financial goals. Equity market movement is dynamic in nature; no one can predict the direction the market may be heading next. So instead of reacting to market movement, one must focus on their financial goals by building a suitable portfolio that can stay strong on both upside and downside market conditions.

Lastly, conduct a periodic review of your mutual fund portfolio. This will help you identify if there is a need to make changes in your portfolio like replacing a fund that has consistently underperformed or to rebalance asset allocation.

This article first appeared on PersonalFN here

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