Equity mutual funds: Safe MF bets in a volatile market

Spreading your money across balanced funds, flexi-cap funds and index funds can help reduce the risks and develop an ideal investment portfolio for the long run

Written by Saikat Neogi

March 28, 2022 1:00:00 am

With increasing volatility in the markets due to the ongoing Russia-Ukraine war, equity mutual fund investors, especially first- time investors, are looking for safe bets. Though market volatility is an undeniable part of equity investing, investments in balanced funds and flexi-cap funds and avoiding small and mid-cap funds for some time can help individual investors minimise their losses.

In the current market scenario, investors will have to temper their returns expectation and go for a mix of active and passive allocation to funds. Moreover, they must stick to their asset allocation strategy as per their risk-appetite and financial goals. Brijesh Damodaran, managing partner, BellWether Associates LLP, says the core portfolio investment needs to be event-agnostic. “It is the tactical investment in which events can be considered for investing,” he says.

So, here are three ways in which equity mutual fund investors can limit the impact of market volatility on their investments and develop an ideal investment portfolio for the long run.

Invest in balanced funds

Balanced funds are open-ended hybrid funds which can help investors mitigate the impact of market volatility and returns on such funds are more dependable over longer periods.

Investors can gain from both rising and falling markets and these are suitable for those looking for a more aggressive alternative to pure debt funds and desirous of investing in equity for higher return potential, while limiting their losses in case the markets fall.

Sushil Jain, CEO, PersonalCFO.in, says one should not invest all their money in a large-cap fund or a diversified fund. One of the main reasons for the current market volatility is the geopolitical tensions, and foreign institutional investors who invest heavily in large-cap stocks are withdrawing from the Indian market.

“So you should invest in a balanced fund which has equity exposure in large-cap stocks. You can make your own portfolio with the help of your advisor and actively manage asset allocation,” he says.

Look at flexi-cap funds

Experts suggest investors should look at flexi-cap funds as they invest across large-cap, mid-cap and small-cap stocks to diversify the portfolio. As the minimum investment in equity and equity-related instruments is 65% of total assets, fund managers can invest freely across market capitalisation and switch between companies and sectors depending on the performance from time to time. These funds help in mitigating the risk and lower the volatility in the portfolio. Investors should stay invested in a flexi-cap fund for 3-5 years to get good returns.

Active or passive?

Index funds are good for passive investors or for core portfolios. However, an investor should not go for an index fund just to save on the costs of investing. If you or your advisor can generate at least 2-3% extra return from your portfolio by actively managing the fund then you should go for active funds. Jain suggests investors should go for SIP in the current scenario which is suitable for all times. But if you have a lump sum then you should invest in three to four instalments whenever the market corrects around 5%, he says. As it is very difficult to time the markets, taking the systematic transfer route from a debt hybrid fund is more suitable for retail investors.

Damodaran says index funds are a more commonly used investment vehicle in developed markets. “Investors in the Indian markets are slowly getting used to index funds and if they want the returns to more or less mimic the indices, then they should invest in index funds,” he says.