Fund Investing in Volatile Markets

In 2008, the equity markets have seen a high amount of volatility. After reaching a high in early January, the markets have been on a downward trend. A variety of global and local events including oil prices, sub prime crisis, inflation etc has influenced the markets.

A common question we have is whether to continue investing in the markets now. Even those who invest through SIP plans in equity mutual funds face this dilemma. There is no shortage of advice either.

We question the logic behind the most common ones:


· Continue investment in the markets as they are for the long -term:
Every analyst worth his salt is downgrading earnings, reducing P/E multiples and predicting ever lower Sensex predictions. If the analysts are so sure that the markets are going down, then why should retail investors continue to invest now? Why cant they wait for the 10k Sensex levels predicted with such confidence by the same analysts to whom they hand over their money? While picking the bottom of a market is different, if there is an overall gloomy scenario and a strong downward trend, then why should invest put up their money now?


· Invest in mutual funds and do not pick stocks directly as one should leave it to the professionals in such tough times:
As of today (15th July 2008), as per Value Research, the diversified equity mutual funds have delivered a 1 year return of – 16%. Add 2.5% administrative expenses and 2.25% entry load, the total return in a year stands at – 21%. Against this the Nifty has a – 10% return over one year. That is a huge difference of 10 % over a year. Why should I hand over my funds to a professional who doubles my loss, when I can stick to an Index ETF with better returns?


· Invest in five star funds recommended by the fund distributors/Value Research:
Currently ICICIDirect wants investors to switch to Sundaram Select Focus and HSBC Equity based on one year performances. Out of curiosity I checked their fund recommendations in 2007. Of course neither fund figured there.

One more curious fact – I have never seen any distributor/MF rating firm put a Sell on any fund. And all these switching of fund portfolios will earn them fresh entry loads. Coupled with the fact that they keep changing their preferred funds every few months, it is difficult to build a long term portfolio using this information.


Summary
So what we need to do in this market – Do not follow any general advice – there is no free lunch!!

In this market it is best for each investor to carry out his own analysis, determine his/her risk apetite, holding period before you decide on MF investments. Remember, asset allocation is the key. When we buy/sell a fund we need to consider the impact on our portfolio.

Today a multitude of options are available (In this blog we have spoken about arbitrage funds, international funds, liquid plus funds etc.)

Building a long term mutual fund portfolio which provides superior returns requires clear understanding of the expected returns and the risks in such portfolios, and it does not help with frequent churning of the funds.