Market beating strategies: How to invest in mutual funds in a volatile market?

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Mutual fund investment: The unexpected election outcomes led to significant volatility in the Indian equity markets in the first week of June. Predicated on expectations of a decisive majority by the incumbent BJP, the market experienced a 3% surge on June 3. However, this was followed by the Nifty 50 index’s most substantial single-day decline in four years on June 4, the day Lok Sabha election results were declared. 

Despite post-election fluctuations, markets have exhibited erratic behavior since early 2024. Within this period, over 52% of listed stocks (1,404 out of 2,603 with a market capitalization exceeding Rs.100 crore) reported negative returns from mid-January to May 2024. Factors contributing to recent market instability include concerns surrounding elections, elevated valuations, geopolitical tensions, and postponed interest rate reductions.

The market has seen such fluctuations before. After the unexpected victory of the UPA alliance in the 2004 election, the stock market experienced a significant decline in the immediate aftermath. Investors were taken by surprise by the election results, causing a 6% drop in the market the day after the elections were declared. By the end of May 2004, the market had fallen by 10 percent, reflecting the uncertainty and apprehension among investors. 

Despite the initial negative reaction, the Indian markets managed to recover to some extent by the end of the quarter, with a manageable 5 percent contraction. However, in the subsequent six-month and one-year periods, the markets bounced back impressively, delivering returns of 10 percent and 19 percent respectively. 

This rebound demonstrated the resilience and adaptability of the Indian stock market, as it not only recovered from the initial shock but also managed to thrive in the long run. The volatility and unpredictability of the market underscored the importance of staying informed and making informed investment decisions in response to changing political landscapes.

How do we navigate the current volatile market?

Last week, Raamdeo Agrawal, Motilal Oswal Group, told Business Today that though there is a risk in the market at present, voters should not stop their SIPs.  “I would like to mention that investing through SIP is best for those who are new to the market or who don’t understand the volatility in the market. New investors and risk averse investors should go for SIPs. Moreover, in the current volatile market, your SIPs should continue. You should not stop investing through SIPs,” Agarwal said. 

Speaking about the volatile market and sectors to invest in, Jyoti Bhandari, Founder and CEO, Lovak Capital, said investors should try to enter sectors like manufacturing, infrastructure, defence, healthcare that in line with the government mandate. 

“Nifty 50 fell nearly 6% on account of the election results not in line with the expectations. In these times, investors shouldn’t sell in a panic and stick to their asset allocation as per their risk appetite. Asset allocation is the foundation of a sound portfolio. These volatile market times allow entering at a reasonable valuation and should use their emergency fund to cater to their immediate liquidity requirements. SIPs should be continued to reap the benefits of rupee cost averaging. Lumpsum investors should take these opportunities to enter into sectors like manufacturing, infrastructure, defense, healthcare and financialization in line with the government mandate,” Bhandari said. 

She added that conservative investors can go for conservative hybrid funds and moderate investors can go for a multicap strategy funds to benefit from the broad-based rally and avoid any concentration risk. Aggressive investors can go for the thematic funds into manufacturing and consumption, Bhandari said.

“In the past few weeks, volatility has gone up sharply as there was general election underway and the ruling party has come back, albeit with a reduced majority. From hereon, the pace and intensity of domestic growth would depend on reforms undertaken in key areas like land, labour, capital etc. Markets could become skeptical about the efficiency of decision making in the future and would like to wait before making a decisive move upwards. Mutual fund investors need to temper return expectations in the short run and remain invested for a longer period of time. SIPs should continue as before and the volatility should be used to enter the markets,” said Sandeep Bagla,  CEO, TRUST Mutual Fund. 
“While investors may invest in individual cap category funds, the allocation across market caps could be left to the experienced MF managers. An ideal strategy could be to allocate to flexi cap funds where in the fund manager could dynamically allocate across different market caps and use the volatility to the advantage of the Indian investor,” Bagla added.

What should the investors do?

Long-term investment strategies

Asset allocation: A diversified portfolio can mitigate risks by spreading investments across different sectors and asset classes, reducing the impact of market fluctuations.

Companies with solid fundamentals: Investing in firms with solid fundamentals can offer protection against market volatility. Seek companies with strong financial positions, steady profit growth, and competitive edges in their sectors.

Mild reaction: Avoid knee-jerk reactions to market downturns. Focus on the long-term potential of your investments and resist selling in a panic to prevent locking in losses.

Short-term investment strategies

1. For investors with short-term investment goals, they can maintain an equity-oriented portfolio with 60%-75% in equities for long-term investors willing to take on moderate risk. 

2. The portfolio should have a sector-agnostic approach and include high-quality large, mid, and small-cap allocations. 

3. A flexicap or multicap fund is suitable for investors who prefer a hands-off approach to portfolio management.

“Flexi Cap funds investors have the flexibility to invest across companies of varying market capitalizations. This allows the fund manager to adjust the portfolio allocation based on market conditions and opportunities. Flexi cap funds aim to provide a balance between growth potential and risk management by diversifying across market segments,” Bhandari added.