Tips for equity mutual fund investors when economy is impacted owing to Covid-19 pandemic

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Once your mutual fund portfolio has been reviewed and streamlined, it is necessary that you hold on to your investments, even if the economy is deteriorating.

The impact of coronavirus pandemic on the economy could have long-term consequences. While the immediate ramifications are already being felt across the economic strata, the footprints of the pandemic may very well remain for years to come. It remains to be seen how resilient our economy is and how fast the recovery happens across the sectors.

After the second wave of Covid-19, the overall growth forecast needs a re-look. Moody’s Investors Service has recently slashed India’s growth forecast for the current financial year to 9.3 per cent saying that the second wave of coronavirus infections hampers economic recovery and increases the risk of longer-term scarring. India Ratings and Research (Ind-Ra) has already revised its GDP growth forecast for FY22 to 10.1% from earlier forecasted 10.4%. The revision assumes the second wave of Covid-19 to start subsiding mid-May 2021 onwards.

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Ind-Ra in its earlier report states, “The demand-side component of GDP namely private final consumption expenditure and government final consumption expenditure is now expected to grow at 11.8% and 11.0% respectively, in FY22, as against our earlier forecast of 11.2% and 11.3% respectively.

In another report authored by Dr. Soumya Kanti Ghosh, Group Chief Economic Adviser, State Bank of India says, “Given the current circumstances of partial/local/weekend lockdowns in almost all states, SBI growth the forecast is revised downwards. Revised SBI FY22 projection now at 10.4% real GDP and 14.3% nominal GDP”.

So, what should an equity mutual fund investor do amidst the prevailing economic scenario? Prateek Mehta, Co-Founder and CBO, Scripbox addresses this concern with FE Online and shares some key investment rules with the investors.

In general, a country’s economic situation is a cyclical outcome, however, resilience is what helps economies bounce back faster than expected. The resilience of a country is likely to be higher if some of the following factors are present:

Demographics of the country: Younger the population, lesser the commitments, greater risk-taking ability.

FDI inflows of the country: As per a UN report, India accounted for 77% of the inward FDI flows in 2019 in South and South-West Asia at 51 out of 67 Billion USD.

Digitisation of the economy: The majority of the FDI flows are in the ICT (Information and Communications Technology) sector. The Jan-Dhan Aadhar Mobile trinity has led to massive financial inclusion across the country.

Reform Agenda: There is massive scope for India to accelerate reforms.

As per the same UN report, India could prove to be the most resilient country in South and South-West Asia. Therefore, a downturn in the Indian Economy should be viewed as an opportunity to invest more, simply because of the country’s ability to be resilient.

That said, there are some investment rules or tips that should be followed:

  • A bad investment in a bad economic situation is a dangerous combination and can be avoided by periodically getting your portfolio reviewed, irrespective of the economic situation.
  • An asset allocation review should be done regularly. It is important to correct over allocation or under allocation. Depending on your case, your portfolio may require rebalancing and selling of excess units.
  • Once your mutual fund portfolio has been reviewed and streamlined, it is necessary that you hold on to your investments, even if the economy is deteriorating. On the contrary, your portfolio should be rebalanced with other asset class positions and/ or averaged out with fresh funds.

A great benefit of staying invested in good mutual funds is that the market will also identify these funds and ensure that there is sufficient cash flow to the fund manager to average out the price of the holdings. Therefore, in times of market correction, it is better to stay invested even if one does not invest fresh cash.

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