- Date : 22/05/2020
- Read: 6 mins
Some fund houses have launched outreach programmes to guide investors in taking health precautions – and, at the same time, maintain business as usual.
Contrary to fears, May has not brought in its wake an unbridled spread of COVID-19 in India. Despite the spike in number of positive cases, the month saw some welcome signs of high recovery rate. This has set off talks of easing the lockdown in some parts of the country, even as coronavirus precautions are being extended in ‘containment zones’, marking as lockdown 4.0.
Despite scattered signs of respite, the effects of coronavirus have impacted the markets. Returns have plummeted, while investors are pulling out their investments, leading to a liquidity crunch.
One of the sectors that have been hardest hit is mutual funds, where investor confidence has taken a beating due to a number of factors. For instance, investments in debt funds have been put at risk on account of an increasing number of restrictions that the government has enforced in recent weeks.
As a result, the bottom lines of businesses are under threat, which puts a question mark over their debt servicing ability, heightening the risk of defaults. Defaults will be felt most by debt funds, which though low-risk, nevertheless face varying degrees of credit risks: the least risky being funds that buy only government securities, and the riskiest being those that invest in low-grade corporate bonds.
Fund classes other than debt funds have also been put at risk because of the slowdown in the economy. As per data compiled by global financial services firm Morningstar, all equity scheme categories (ELSS, large-caps, small-caps, mid-caps, and multi-caps) have seen returns fall by around 25% over a month, between February 19 and March 18.
Credit-oriented debt funds are facing a different challenge – that of redemptions, as many investors have withdrawn their money. This has left the remaining investors with a bigger exposure to risky debts.
Related: Can you beat the slowdown with SIPs?
Of course, debt funds can resort to various methods to shore up liquidity, such as taking credit lines from banks to meet redemptions, imposing stiff exit loads, and limiting the amount a single investor can invest in a debt scheme. How exactly the various fund houses plan to tackle the challenges facing their debt funds will become apparent in the weeks to come.
Why is it advisable to stay invested in mutual funds?
But there’s another way. Investor confidence can be restored through aggressive awareness campaigns to highlight the advantages of mutual funds. Many fund houses such as DSP Mutual Fund, Edelweiss and other – are doing just that by launching outreach programmes.
For instance, DSP Mutual Fund, which deals in five main fund classes (equity funds, debt funds, hybrid funds, foreign funds and solution funds), has launched outdoor awareness and educational campaigns in their ELSS category. Named Bachao (‘save’), the programme serves a dual purpose: it spreads awareness on coronavirus protection through messages on billboards and bus shelters in Mumbai, and also contextually underlines how it is a wealth creator.
Many other companies and fund houses, on their part, are proactively working on crucial fronts to grapple with the crisis – both at the social and business levels. First, they have allowed employees to work from home; ensuring their safety and securing productivity by blending social responsibility with business commitments. They are making attempts attempts to spread the awareness about coronavirus precautions such as maintaining social distancing and seeking a doctor’s advice on ‘remote symptoms’ such as cough and cold.
While other companies have been taking measures such as using infrared thermometers to record the temperatures of all attending employees and visitors, and making sanitiser bottles available at the reception. Hand washing has been made mandatory. This way they are communicating responsibly with both partners and investors.
What are the investors’ options?
Viewed against the backdrop of the COVID-19 outbreak, and the resulting slowdown in the economy, what should investors do as far as mutual funds are concerned? Remain invested, sell off, or view the downturn as an opportunity to invest more?
Analysts quoted in media reports have suggested that individual investors wait out the volatility in the market, and not dabble in small- and mid-cap stocks until the markets return to normal. In their view, these individual investors should ideally stick to their investment plans, without panicking or losing focus, and keep an eye on the long-term picture, even though volatility will continue in the near-term.
Investors have been advised to maintain a portfolio that boasts of mutual funds with a positive track record, listed stocks, and tax-free bonds; this, analysts feel, will see them through market ups and downs. Some analysts have suggested that investors consider value investing.
Consider Systematic Transfer Plans (STPs)
They also suggest that mutual fund investors consider STPs (systematic transfer plans). Under this, funds are transferred from one scheme to another in the same fund house, say from debt to equity. They advise against exiting SIPs (systematic investment plans) because of the unfavourable market conditions and the slowdown. Instead, they recommend that investors rebalance their mutual fund portfolios at intervals.
Data shows that the longer one stays invested in a SIP, the more likely they are to book a profit. However, bad funds invariably let down investors even in the case of SIPs. So if an investor is saddled with an underperforming fund, rebalancing the portfolio becomes important.
Also, a SIP has an inherent advantage, as it allows investors to buy units on a fixed date every month, which means there is no need for misadventures like timing the market. The investor can buy more units when a scheme’s NAV is low and less when the NAV is high. This way, the cost is averaged out. The slowdown provides an opportunity to buy more units.
In conclusion, it’s important to remember one’s goals, and take coronavirus precautions even as one goes about investing. Plus, when there is a health crisis such as the prevailing pandemic, it pays to be prepared financially to face any contingency, and to invest in term insurance and health insurance policies. These are important when one is looking at long-term investing.
For those with a short-term outlook, it is important not to panic over inadequate returns as markets will be down for some time; previous trends offer the assurance that they will eventually recover. When it comes to long-term investing, investors are advised to remember what the analysts say: keep on investing and start a SIP in a suitable fund that matches one’s goals.
It is important for investors to review their investments regularly. And of course, as has been emphasised repeatedly in these columns, they should not hesitate to consult a trusted and qualified financial advisor. Read these 8 Dos and Don’ts of personal finance you must follow during an economy slowdown.