It has really been a tough time for equity investors. Many Indians took to equity via mutual funds in the last two to four years. With the market crashing over 35 per cent in the matter of a few weeks, watching the returns, and for some, even the investments made, vanish at such a rapid rate can be painful. We caught up with Aashish Somaiyaa, MD and CEO of Motilal Oswal Asset Management Company, to understand what investors should do in such turbulent times and what should be their investment strategy now. Excerpts:
Most new investors in mutual funds only began investing two to four years ago. What would your advice be for these investors in the kind of carnage we have seen in stock markets in March?
These are trying times for everyone investing in mutual funds and their patience and maturity to ride through this will be tested. When we look to invest, we are all long-term investors. But whether we are really long-term investors or not gets tested when portfolios are 30 per cent down. There could be a day where markets get really bad and it is not possible to time things accurately. That is why we do systematic investment plans (SIPs); so, how committed we are to our SIPs and do we take advantage of the current fire sale or not, is getting tested. My advice is simple—do nothing. Continue with your SIPs and stick to your plans.
Have you seen redemption pressures coming in, following the market crash or are investors still willing to hold?
With every few years a new cohort of youngsters and investors seem to enter the markets. I have seen such market upheavals at least three times since 1999 and in my experience, there is a marked difference in understanding and maturity levels of investors. Thus far, we have seen no spike in redemptions. Having said so, when markets recover and values are restored, I do expect some people to bolt for the door. Having seen the worst, it would be a wrong move and people who move out will regret. Nonetheless, I do expect that redemptions may pick up after the market values are restored.
Typically when markets fall sharply, the advice is to increase allocations, double your SIP investments, etc. In the uncertainties that we are in, is that a good idea or should we just wait and watch and deploy additional liquidity to short-term debt or liquid funds?
If these uncertainties are behind us, even the markets won’t be where it is. I would urge everyone to increase the SIPs and if they do have additional liquidity, they should start deploying with a spread over the next three months. Even people who do not have liquidity, but have some semblance of an asset allocation would find that their equity allocation has gone down dramatically, while debt allocation would have proportionately increased. They should rebalance in favor of equity.
As a fund house are you still investing whatever fresh inflows you are getting or are you sitting on the cash?
We believe that in equity funds, sitting on the cash tantamount to second guessing the planning done by the investors and their advisers or distributors or wealth managers. In equity funds, we are fully invested. But your question does apply to our dynamic fund and our equity hybrid fund. In the last few days, we have been rebalancing in favor of equity just the same way that I am suggesting to clients for their own portfolios.
You had launched a basket of passive index funds a while back. Should one just park the money there amid the volatility?
I always tell everyone that if you don’t know what to buy just buy the market. Index funds do come in handy at such times. Right now, I won’t be surprised if people find it difficult to make up their minds on which market cap and what sector orientation and what funds to buy. I would ideally say one should buy funds in the large and mid-cap category where one has a 50 per cent: 50 per cent split. If making such choices is difficult, the least an investor can do is to buy Nifty, Nifty Next 50 and Nifty MidCap 150, which would basically end up in the same universe as a large and mid-cap fund.
When do you see some stability emerging in the markets? Amid the fall, eventually we will reach a stage where the valuations will be extremely cheap, compared with their intrinsic value. That realisation doesn't seem to be there yet among investors?
The kind of fall we have seen in the past four weeks and the reasons behind it make it highly prone to a sharp bounce back quite unexpectedly at some point in time. I am talking about stock markets, I am not talking about the human health hazard or the fallout on the economy. We still have to watch and I hope the spread of the virus comes under control at the earliest. But in the background, central banks, governments—especially in the US and Europe—have already pulled out all stops to contain the economic fallout of the “lockdown”. The day there is some belief about the rate of spread of virus receding or the fatalities coming under control, I will not be surprised if the markets see a sharp spike in the opposite direction. I don’t intend to make light of a serious situation, but I do believe that this health hazard, which has now become a financial collapse, has already erased upwards of 35 per cent of entire global market cap and in India, it has done so even before it materialised. I am not saying an upward spike can recoup the entire fall, but upwards of 50-60 per cent can be recouped quite swiftly if the news on the virus gets better at some point in time.
Will balanced advanced funds gain more traction now?
It is an ideal category for investors who will put their money there and remain through the cycle—it can give equity participation with literally half the volatility. The sad part is they always get traction after the damage is done, i.e., now in March 2020. Whereas in 2018 and 2019, we got some outflows in Motilal Oswal Dynamic Fund because we were “underperforming” Nifty and equity funds. I rest my case there.