You would have been following the news around the sharp decline in the stock market indices over the past few weeks. In the current financial year (since 1-April-2018), the Nifty is up only 2% whereas the BSE Midcap index is down nearly 20%. Much of the fall has happened over the past 5 weeks. This has affected the performance of most equity mutual funds.
Why is this happening?
The fall has been triggered by a combination of economic events. A trade war globally and a few other global events, have led to a sharp increase in oil prices. This has led to a sharp fall in the Rupee. From Rs 64 to a dollar in Jan-2018, the Rupee has fallen to Rs 74 per dollar along with increased risk of higher inflation and higher interest rates. If you have a home loan, you may have got an alert for an increase in your home loan rates. Events related to the banking and finance sector, especially IL&FS defaults, also contributed to this.
What does this mean for my investments?
Volatility in equity markets is always expected, if not guaranteed. Over the last several years, equity mutual funds have delivered healthy rates of returns, but these will be associated with volatility. In fact, some of the Mutual Funds are up nearly 80-100 times over the last 20 years, but have had their own share of volatility. If there is some solace, volatility in recent times is less than historical volatility.
More importantly, by buying into equities, you are essentially buying into some of the best companies in India. Companies like TCS, Reliance, HDFC, HDFC Bank, SBI, Hindustan Unilever, etc address the increasing needs of the Indian customer. In the past, we have seen volatility in currency, oil prices and a lot more crazy global events. (In 2015, the Rupee spiked from 60 to 68 in a short span of time, and then settled down for the next 3 years). These have not impacted the long term growth prospects of these companies, nor the consumption needs of the people in India. Quality of life today is significantly better than a decade back, and will be far better a decade from now. The only way to ride this trend is to invest in stocks of these companies and stay put.
What about the funds Scripbox is recommending?
Portfolios of our equity mutual fund recommendations include a mix of larger companies (Nifty) and mid-sized companies (BSE Midcap), in order to maximise returns over time adjusted for risk. Given the sharp correction in midcaps, our combined equity mutual fund portfolio returns are below overall Nifty returns, but ahead of the Midcap Indices, reflecting the portfolio mix. The gap should narrow as and when markets recover.
On the debt side, the liquid and shorter duration funds are doing well, with returns of about 7%. The longer duration funds have faced headwinds when there is a sharp rise in interest rates. These funds will recover, when interest rates revert back to normal trajectory. Since we focus on reducing credit risk, our recommended debt funds have a history of prudent decisions. Specifically, they don’t have any exposure to the likes of IL&FS.
What should I do?
Successful investors have the habit of staying the course and reaped the benefits of staying invested. The real goal here is to beat the returns offered by fixed income (like the bank deposit rate of return) and investing in equity markets, through Mutual Funds, which have historically beaten fixed income returns by a wide margin. There is no reason to believe this will not continue.
If you want to help a bit, go out there and consume products of the companies in your portfolio of Mutual Funds. The festive season is here and this is the time to cheer.