With an end in sight for market uncertainty, mutual fund investors should stay invested to reap gains

Dubai: Amid a recovering market backdrop, those invested in Mutual Funds, like other investors, would have seen their portfolios decline in the past many months of the pandemic, particularly as markets slumped worldwide.

However, as panic-stricken sentiment gradually eases, if you have held on to your investments despite the declines in the past months, veteran investors recommend that you remain invested for a short while longer to make up for your losses, and brace for potential bigger gains in the near term.

Mutual Fund investors in general have had a longer term outlook, meaning they stay invested despite market downturns. While investors should keep in mind the near-term liquidity or cash for immediate expenses, experts recommend that investors should keep investing. They particularly agree that those Mutual Funds under the small-cap and mid-cap funds that were beaten down during the pandemic have significant upside in the months and years to come.

How Mutual Funds performed this pandemic

Amidst the global liquidity crunch, the Mutual Funds market could also not stay immune against the COVID-19 pandemic.

What was once considered to be the safest form of investment, despite turbulent market conditions, no longer appears to be the same especially after Franklin Templeton Mutual Fund shut six debt schemes in India amounting to about 280 million Indian Rupees (Dh13.9 million) from April 23, citing lack of market liquidity and redemption pressures arising from the COVID-19 pandemic.

However, although Mutual Fund returns have taken a sharp hit due to the coronavirus epidemic, history has shown that markets and Mutual Fund returns have always come back stronger.

Many experts, especially in the mutual funds sector, advise that the investors shouldn’t panic and stay focused and invested in the long run. Now despite the declines, those who decided to stay invested are set to reap returns as stock markets return to normalcy in the past weeks, and continue to be on track to do so, analysts reveal.

This time around, during the current pandemic-related market crisis, mutual fund managers made an observation of an interesting trend wherein when the markets fell, there was a rush in investments. This is contrary to how it used to be 10 to 15 years back, where if the markets fell the small individual investors were the first ones to panic.

Fund managers further note that this only displays a more mature investor behaviour wherein participants are viewing market corrections as an opportunity rather than a threat.

So can you invest in Mutual Funds now?

As of now, the market is going to go further up as vaccinations are showing promising results and analysts add that if everything goes according to plan the world would win the battle with the contagion. Moreover, the market is rising steadily even though there are several questions about the resilience of the vaccine, economies and company profits.

While it’s impossible to try to predict the future of the market and link your investments with it, investment portfolio managers reiterate that the general rule is always the same: Invest according to your goals, investment horizon (investment term) and risk profile (which varies according to your needs and financial goals). Choose investment options based on these factors, rather than the prevailing market conditions.

So, the prevailing advice is to identify your goals, investment horizon and risk profile. What this means is if you are investing for long-term financial goals that are at least seven to 10 years away, you may consider investing in equity Mutual Funds. That is, provided you are willing to take risk.

Furthermore, always choose equity Mutual Fund category based on your risk profile. For example, if you are conservative equity investor, stick to large cap Mutual Funds. If you are a moderate investor, you may stick to flexi cap funds. Aggressive investors may choose mid cap and small cap schemes.

Mutual Funds are getting pricier

It’s been nine months since the COVID-19 pandemic gripped markets across the globe. Though economies across the globe suffered the wrath of the virus, markets across the world have galloped by 35-40 per cent, bouncing back from the March lows.

Mutual Funds too have been recovering gradually after slipping sharply four months – making an ideal time to invest into the markets. After the sharp market rally in stocks seen these past months, although mutual fund valuations aren’t as cheap as it was when the markets slumped, it does present an opportunity to review and rebalance your portfolio.

In the current scenario, like mentioned earlier, it is best to have something of everything, depending on your age, risk appetite, income and other factors. A balanced portfolio will have a judicious mix of equity and debt. Based on risk appetite, here are three model portfolios.

How you can alter your Mutual Fund portfolio

If you are an aggressive investor, it would be largely equities in the portfolio. However, it would be advisable to increase exposure to large-cap Mutual Fund schemes (close to 60-65 per cent) with the rest in select multi-cap and mid-cap Mutual Fund schemes.

The choice is more difficult for investors with moderate and conservative risk profile due to pretty low yields on the fixed income instruments currently. Thus, it becomes essential to have some exposure to stocks or other alternate asset like gold to provide some boost to the blended returns of your portfolio.

Consequently, multiple experts also advise close to 20-25 per cent exposure to hybrid funds along with 8-10 per cent exposure to gold ETF (exchange-traded fund) for moderate risk profile investors whereas the conservative investors could limit their exposure to hybrid funds and gold to 15-20 per cent range only.

Investors with moderate risk profile could also look at debt instruments with a higher credit rating to an extent of 10-12 per cent of their portfolio allocation.

Also keep some cash handy

Though the conservatism of the early COVID-hit months has receded a bit, veteran investors continue to reiterate to keep some proportion of your savings as cash to battle contingencies.

Moreover, this cash reserve can also be used to take hold of good opportunities to invest in quality stocks in a staggered manner for the long run.