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BT Buzz: Investors dump equity MFs with Rs 4,000 crore outflow, should you?

The equity market has seen a roller coaster ride. Most investors are likely to have found it too adventurous. They would have looked to exit the market in the first opportunity

BT Buzz: Investors dump equity MFs with Rs 4,000 crore outflow, should you?

A rapidly falling market didn't quite allow investors to strategise and implement a gradual exit plan

After the worst market crash of the decade earlier this year, equity mutual fund investors were waiting to exit the market. Open ended equity schemes saw a total net outflow Rs 3,999.62 crore in August, which was more than net outflow of Rs 2,480 crore registered in July. Barring three categories ELSS, Focused Fund and Sectoral/Thematic Funds, all other categories witnessed net outflows. Large-cap funds saw the biggest outflow of Rs 1,553.50 crore, while multi-cap funds saw the next biggest outflow of Rs 1,157.21 crore.

"This is general investor behaviour, we have also seen in the past that after a fall in the market post-recovery we generally see outflows. This was also seen in post-GFC (Global Financial Crisis) recovery," says Santosh Kumar Singh, Head of Research, Motilal Oswal Asset Management Company. Investors are looking to book their profit and some even fear a market correction.

Many investors stuck during rapid fall

The equity market has seen a roller coaster ride. Most investors are likely to have found it too adventurous. They would have looked to exit the market in the first opportunity. However, a rapidly falling market didn't quite allow them to strategise and implement a gradual exit plan.

Back in March, investors woke up to market hitting new lows. If they thought the worst was over, they had a shock waiting the next day. After all, it took only 12 trading days from March 5 to March 23 for Sensex to fall from 38,470 to 25,981.

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Little surprise, many investors found no merit in exiting the market with losses of 25% and above. So, they adopted a strategy to wait and watch, and exit when the loss was minimised.

Is the exit required any longer?

Since the Sensex is now only 9.84% away from its all-time closing peak of 41,952 registered on January 14 this year, should investors  exit now, or continue with their investment?

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Cycle of fear and greed often take their turn in the equity market. When the correction started it looked like it would sweep away even the strongest of brands, but it proved to be very short lived. The recovery has been equally impressive since March 23 when Sensex touched this year's lowest level of 25,981. Since then it has grown by an impressive 47% within a span of less than 6 months and reached 38,193 on September 9.

In the early days of coronavirus pandemic, there was a great deal of uncertainty which accentuated market correction. However, sanity eventually returned. As the market recovered, many investors who were desperately waiting to exit found a favourable window. But this is not a trend likely to continue.

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"I do not see it anyways as a long-term trend. Once we see clarity emerging we would again start seeing inflows in the asset management industry given financialisation of assets," says Singh of Motilal Oswal AMC.

If you are long-term investor, it may not be right time to exit the market since there is enough evidence that returns are mostly on the higher side in the long-term.

Even during the worst phase in March, the long-term return of most of the well performing large cap diversified funds were giving a return of more than 8% over 10-year period. Mid-cap and small-cap funds which were under-performers before the crash emerged as better performers after the recovery.

"Share market moving up and down is an intrinsic part of investing in markets, but investors need to have a long-term perspective and should focus more on whether they are making progress on their financial goals," says Rishad Manekia, Founder and MD, Kairos Capital Private Limited, a Mumbai-based financial planning firm.

Though corporate earnings still look far from returning to pre-Covid level, investors have by and large figured out the firms which can withstand the pandemic, and are betting on stocks which with best revival possibilities. The price of shares reflect the earning capacity of an organisation for at least next 10-15 years. So, investors find companies positioned to do well in future attractive despite one or two bad years.

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Good to be cautious but stick to your goal

There is a good possibility that many weaker organisations have not been exposed due to global flush of liquidity, and government relief measures like loan moratorium. Such organisation may prove to be wealth destroyers once their actual weakness is exposed after the relief period.

"This is also a function of the uncertain environment where the markets recovered significantly but we are still seeing significant negative data both on the virus and the economy. We have seen multiple market participants advising caution and this is a cautious stance of the investors," says Singh of Motilal Oswal AMC.

While such pit holes will always be there, if you are invested in good equity mutual fund then you should let the expert fund managers take care of such pit holes and the market volatility. As an investor you should rather stick to your long-term investment goals.

"Ideally, the exit from mutual fund investments should be linked to the investor's financial plan and not to short term market movements," says Manekia of Kairos Capital Private Limited, a Mumbai-based financial planning firm.

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Right time to realign your investment

Most of the equity mutual funds have made good recoveries and it is the time to check whether you are sticking to the right funds. Such extreme volatility creates big distinctions between well-performing and non-performing mutual funds. If any of your funds have been consistently underperforming the benchmark then rather than exiting it's time for you to switch to a good performing fund. "It is best for an investor to identify well rated funds for investment, evaluate them periodically and stick with the investment generally till they reach their goals. However, there are some circumstances where the rating of the funds have gone down substantially, or the fund mandate or management have changed, or some other factor has impacted the financial situation. That's when investors should consider exiting investments from a mutual fund scheme," says Manekia of Kairos Capital.

When to go for withdrawals

Your decision to increase or decrease equity exposure should ideally be linked to time left to achieve your goal. If your goal is less than 3 years away you can gradually start moving your gains to safe assets like liquid funds or bank fixed deposits. However, if you are still long way from reaching your goals but fearful about a market crash in near term, and want to guard your funds against any such big correction, it would be better for you to liquidate only 25% of your portfolio and park it in liquid funds. Else after some time, say next 6 months, when you get the confidence back you can start a systematic transfer plan to increase your exposure to equity in a staggered manner.

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