March mayhem in equity markets: Where to invest your money today

The pain in smaller-cap segments has been more severe as Nifty Midcap 150 Index and Nifty Smallcap 250 Index have fallen 4.12 and 5.95 percent, respectively, since March 7 to March 15.

Indian investors have been witnessing a rollercoaster ride on the stock markets of late, particularly those involved in the mid-cap and small-cap segments. The turbulence has left many mutual fund investors pondering over their investment strategies.

Since hitting all-time highs on March 7, benchmark indices Sensex and Nifty have declined 2 percent in just five trading sessions. The pain in smaller-cap segments has been more severe as the Nifty Midcap 150 Index and Nifty Smallcap 250 Index have fallen 4.12 and 5.95 percent, respectively, between March 7 and March 15.

Investors are grappling with questions of asset allocation, lumpsum versus Systematic Investment Plan (SIP) investments, and concerns about pricey valuations.

Stay the course

The recent downturn in mid-cap and small-cap funds underscores the importance of diversification in a portfolio. While these segments can offer lucrative returns during bull markets, they also tend to be more volatile, as evidenced by the recent downturn.

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Suresh Sadagopan, Managing Director and Principal Officer at Ladder7 Wealth Planners, says an investment strategy should not be changed based on market fluctuations. “Invest as per your broad asset allocation. Mid-caps and small-caps are for people who have time on their hands, who have a very high risk appetite, and who are truly willing to wait for the long term—seven to 10 years. For a real aggressive person, I would probably go to maybe 25-30 percent in mid-caps and small-caps put together,” said Sadagopan.

Asset allocation plays a pivotal role in mitigating risk and maximising returns. In times of market volatility, it is prudent for investors to reassess their asset allocation and ensure it remains aligned with their long-term objectives.

Stick with SIPs

When deciding between SIPs and lumpsum investments, investors should consider their investment horizon and market outlook. SIPs offer the advantage of rupee cost averaging, allowing investors to buy more units when prices are low and fewer units when prices are high, thereby potentially reducing the impact of market volatility.

On the other hand, lumpsum investments may be favorable during periods of market correction or when valuations are attractive. However, timing the market can be challenging, and investors should exercise caution to avoid market-timing pitfalls.

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Prableen Bajpai, Founder of Finfix Research and Analytics is of the opinion that investors should limit lump sum investments to large-caps at this point. “For mid-caps and small-caps, we are suggesting STPs (Systematic Transfer Plans) via arbitrage or liquid funds. On dips, investors can do switches into target funds. Elections are also coming up and post that full Budget will be presented, therefore, it is time to be cautious,” said Bajpai.

Overall, investments must always be aligned according to an investors risk appetite and suited asset allocation.

Diversifying assets

While it is essential to be mindful of valuations, attempting to time the market solely on valuations can be a futile endeavour. Rather than trying to predict market movements, investors can adopt a disciplined approach to investing, staying committed to their investment strategy through market ups and downs.

Debt funds are important components of a well-diversified investment portfolio due to their ability to provide stability, regular income, and capital preservation.

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According to Sadagopan, debt allocation is based on an investor’s requirements in terms of upcoming goals. “If goals are coming up in the near future, the debt allocation will be high. A strategic allocation to debt and equity will depend on one’s risk profile, the timeline of the goals, years to retirement, liquidity needs and taxation,” he said.

With the government’s focus on fiscal prudence in the Interim Budget and the Reserve Bank of India maintaining status quo in the last policy meet, the experts believe this is a good time to go for long-duration bond funds.

When it comes to gold, Bajpai noted that the yellow metal has seen a decent run-up over many years apart some minor dips. “Lumpsum investment at this point can also be a bit risky, but smaller allocation to SGBs (sovereign gold bonds) or gold funds, like 5 percent of one's portfolio, can be done,” she said.

No need to panic

Per a recent Moneycontrol report, small-caps have been correcting for the past three weeks due to a combination of factors, including Enforcement Directorate raids on a big market operator and allied entities and the capital markets regulator flagging 'froth' in the market and asking mutual funds to a conduct a liquidity stress test.

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“The entire episode of SEBI reviewing mid-cap and small-cap funds was supposed to be from the perspective of making investors alert, but many started looking at it more like a panic situation. Such incidents can have an impact on investors' confidence and trust in mutual funds. Investors should continue with their trust and investments in Mutual Funds, but need to set returns expectations right after the kind of gains Indian markets have seen over the past few years, especially in small-cap and mid-cap segments,” said Harshad Chetanwala, Co-founder, MyWealthGrowth.com.

In conclusion, while the recent performance of mid-cap and small-cap funds may have raised concerns among mutual fund investors, it is essential to approach investing with a long-term perspective.