With equity markets in turmoil, you may have plenty of questions on what to do with your equity portfolio and whether you could look at strategies to make your portfolio returns look better. In this article, we attempt to provide answers to some of your frequently asked questions:
My SIPs are sporting terrible returns. Should I stop them?
Stopping your SIPs in a market downturn could be the worst thing you can do to your portfolio. By not allowing your fund to average during the falls, you cannot expect it to deliver returns when the bounce back happens.
Just to illustrate, take a look at the NAVs of Franklin India Bluechip in 2008. Had you simply continued the SIPs, in no time would you have seen a bounce back in your portfolio (with an annualized return of 27%), the next year.
In the same example, had you stopped your SIPs say in June 2008, then your returns as of June 2009 would have been a sad -4.9%! This is for a less volatile fund like Franklin India Bluechip. You would actually average much more in a fund that is more volatile.
So long as your fund choice is good, keep your SIPs chugging. But use the opportunity to sell some laggards too. Prolonged down markets will clearly differentiate the stable performers from the laggards.
Should I invest as lump sum now, as the market is falling?
If you have enough surplus and have a 5-year view then it may not be a bad idea to invest in lump sum in the equity market now. But then what if the markets fall another 10-15% from here? That’s where using triggers helps you invest in a staggered manner.
Consider splitting your surplus into 3 parts and set your own triggers in your FundsIndia account to invest them. Read our article Should you wait for the economy to bottom before you invest? to build yourself a strategy to invest.
But ensure you do not go on averaging indefinitely if the market fall is prolonged. Set aside a surplus and be done with the staggered investment. With a 5-year view, it does not matter if you do not bottom fish, till the very bottom that is.
The markets are swinging every day. Will daily SIPs work better for me than monthly SIPs?
If you are a long-term investor, you really don’t need a daily SIP. Over longer periods of 5 years or so, IRR from daily SIPs in equity funds have actually shown to be lower than monthly SIPs.
That said, if you have enough cash and wish to capitalise on every single fluctuation, then using daily SIPs for short spurts, say for 3-6 months, during volatile markets can be one strategy.
During 2008, daily SIPs done for about 6 months or so, actually delivered marginally higher returns than monthly SIPs. But the benefit was lost if the daily SIP was continued for longer periods.
Also, you need enough cash (to be able to do the minimum investment every single day) for this and should also make sure that you switch to monthly SIPs, once such volatile market is done with.
Otherwise, you will be better off simply using triggers to invest occasionally, along with regular monthly SIPs.
IT and pharma stocks are doing well despite the turbulence. Should I invest in these sector funds?
You may, only if you understand the sectors. IT and pharma sectors in India are export-oriented and have therefore benefitted from the rupee depreciation. It is for this reason, these stocks and their sector funds have done well. Yes, with rupee continuing to be volatile, these sectors may be treated as a hedge to your portfolio.
But then, they should simply be used as diversifiers (together up to 10% of your portfolio) and nothing more. Also, avoid long-term SIPs in sector funds. There is no point averaging when a sector is in an uptrend.
When the market tide turns, chances are that the beaten down sectors will do well. By holding to much exposure to these defensive spaces, you may miss the rest. Besides, diversified equity funds themselves have been upping their exposure to these sectors and you are likely to get some exposure through your non-sector funds as well.
Indian economy and market is underperforming and US looks all green. Should I invest in international funds?
Just as theme funds cannot be your core portfolio, nor can international funds be. International funds offer flavours of different markets and economies and are therefore best used as diversifiers.
While the short- to medium-term returns of markets such as the US do seem captivating, remember such developed markets have not offered more than 5-6% returns annually over a decade. Growth markets like India are likely to surpass.
Also, the current rupee’s depreciation against the dollar and other major currencies has made international fund returns look more attractive than their real performance-based returns.
Yes, use these funds, if you must, to hold stocks/sectors that you may never get in the Indian markets. But be judicious in your exposure. Also, do not forget that there could be other emerging markets, which although equally volatile like India, can deliver superior returns compared with U.S in the long term. Hence, decide where you should place your eggs.