Is this the Best Time to Sell Your Equity Mutual Funds? - Outside View by PersonalFN

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Is this the Best Time to Sell Your Equity Mutual Funds?
Dec 3, 2020

The Indian equity market has scaled new highs and the upward move since the March 23, 2020 low has been remarkable, taking everyone by surprise.

In November, the Benchmark S&P BSE Sensex hit a record high of 44,825 with all-around participation - from retail investors, High Net worth Individuals (HNIs) and Foreign Portfolio Investors (FPIs). The FPIs, in particular, bought whopping Rs 62,951 crore - the highest ever since the data was made available by the National Securities Depository Limited (NSDL).

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Factors such as the long list of fiscal measures announced by the government to boost demand, reforms, successive policy rate cuts by the RBI to address growth concerns (and accommodative stance), comfortable liquidity in the system, encouraging news on the efficacy of coronavirus vaccines, and the US election results have all imbued positive sentiments in the Indian equity markets.

Graph: Remarkable recovery of the S&P BSE Sensex

But with the remarkable up move, valuation-wise Indian equities look stretched. Some savvy investors are now wondering if they should hold on to their position or book profits in equities and move out.

At the start of lockdown, it was the Fear of Missing out (FOMO) on the opportunities in the Indian equity market. However, over the last few months, the sentiments now border on greed and fear.

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While some investors have pulled out of their investments (at profits or loss), others with capital to invest are waiting on the side-lines, apprehensive about the margin of safety in the current scenario.

Mutual funds have gained abetted by the stupendous market rally; but for certain sub-categories of equity-oriented mutual funds, medium-term returns, i.e. over a 3-year period, have been nothing to vie for (see Table below).

Table: Performance of sub-categories of diversified Equity Schemes
Category Average Absolute (%) CAGR (%)
6 Months 1 Year 2 Years 3 Years 5 Years 7 Years
Large Cap 35.62 7.93 11.19 6.76 10.68 13.41
Mid Cap 46.23 20.22 13.17 4.55 11.33 19.2
Small Cap 56.74 23.25 12.41 1.1 9.46 18.04
Multi Cap 36.78 9.09 10.59 5.7 10.58 15.14
Large &Mid Cap 38.78 9.94 10.73 4.7 11.34 15.72
ELSS 38.06 8.75 9.04 4.64 10.77 14.58
Value Fund 40.31 9.4 6.39 2.28 9.14 15.51
Focused Funds 35.81 10.37 11.05 5.8 11.36 15.19
Contra 40.01 15.16 11.51 8.07 13.74 15.17
Dividend Yield 34.54 12.76 9.02 4.14 9.78 12.53
NIFTY 50 - TRI 40.2 8.31 11.48 9.01 11.7 12.56
S&P BSE SENSEX - TRI 40.9 8.91 12.78 10.68 12.46 12.84
Data as of November 27 2020
(Source: ACE MF, PersonalFN Research)

When assessed over a 5-year and 7-year period, certain sub-categories of diversified equity schemes viz. the Mid-cap Funds, Small-cap Funds, Multicap Funds, Value Funds, and Contra funds have exhibited an appealing performance.

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If you are holding equity-oriented mutual fund schemes and considering selling your holdings, do so if...

  • You have met your financial goal
  • Are in an emergency, and therefore need the money
  • Your risk profile has altered
  • The fundamental attributes of a scheme have changed, which may not be suitable for you
  • Your investment objective has changed since you first invested
  • The scheme's performance has not lived up to your expectations
  • The scheme has been a consistent underperformer vis-a-vis its benchmark
  • Your asset allocation review warrants a change
  • Your investment portfolio needs rebalancing and there are better alternatives
  • You wish to change the investment style of the portfolio (growth, value, aggressive, conservative, etc.)

Do not be lured by the returns that the equity market has given in the last 6 months or a year, a good scheme reflects returns consistently over all phases; not only during the sudden Bull Run.

Do not decide to sell mutual fund schemes arbitrarily; instead, do a comprehensive portfolio review seeking professional help.

Is it worth holding on equity mutual fund schemes that have underperformed?

To begin with, make sure that you are not considering the scheme as an underperformer solely based on its recent performance. The performance of any equity scheme depends on various micro and macroeconomic undercurrents, particularly the way the scheme is managed by the fund manager.

Do note that a top-performing equity mutual fund scheme may lag in its performance for a year due to certain market conditions, but that does not make the scheme a dud per se.

[Read: Why do certain mutual fund schemes underperform?]

The decision to sell should be taken only after evaluating the potential of the respective scheme, studying its portfolio characteristics, investment strategy, performance across market cycles, rolling returns, the risk it has exposed you to, the investment philosophy of the fund house, and macroeconomic picture.

Here's a macro picture to give you a sense of direction of the Indian equity markets...

India's GDP after a sharp contraction -23.9% in Q1FY21, has recovered to -7.5% in Q2FY21 with the unlocking and easing of restrictions from the COVID-19 lockdown. However, there's a lacuna between the real economy and the Indian equity market. The economic projections, although revised upwards, still look grim.

The RBI Governor, Mr Shaktikanta Das has cautioned that the recent surge in COVID-19 infections in advanced economies and parts of India continue to pose a potential risk to growth. Also, the capital account convertibility will continue to be approached as a process rather than an event, taking cognizance of prevalent macroeconomic conditions.

Contraction of -2.5% in October 2020 noticed in the eight core sectors is a cause of concern. And given that core sector data has nearly 40% weight in the Index of Industrial Production (IIP), it may have bearing on the IIP reading as well.

The improvement in profits of corporate India in Q2 was largely on account of cost rationalisation than much in sales volumes and revenues.

The government says the data points towards a V-shaped recovery of the economy, but for it, consumer demand needs to improve considerably and infections amid the second wave of coronavirus must be contained. If India does actually witness a strong second wave of COVID-19, it may pull down growth and disappoint markets.

In the near-term, the Indian equity market is likely to be volatile. Do not try to time the market for a few percentage points; it may not be worth the risk and prove hazardous for your wealth and health. If you are planning for certain long-term financial goals, consider SIP-ping into equity-oriented mutual fund schemes. SIPs will help you mitigate the risk involved due to the inherent rupee-cost averaging feature and help compound your hard-earned money.

The market may go through such short-term phases of panic, but in the long run equity as an asset class has proved to fare better than most others. Therefore, follow a rational approach while considering selling your equity mutual fund schemes. Your investment decisions should mainly be based on the achievement of your financial goals, and not solely on the direction of the market.

In a market that is expected to be volatile, keep in mind the current factors such as the second wave of coronavirus, potential lockdown or restrictions to contain the spread of the deadly pathogen, as well as the geopolitical risk.

Dear investor, if you wish to hold worthy and rewarding mutual fund schemes that can help you reach your financial goals, consider subscribing to PersonalFN's unbiased premium research service, FundSelect. Each mutual fund scheme recommended under FundSelect goes through stringent parameters - quantitative as well as qualitative - before making it into the recommendation list. FundSelect service will provide you with insightful and pragmatic guidance on equity mutual funds and debt schemes - to buy, sell, or hold. Subscribe to PersonalFN's FundSelect.

Author: Mitali Dhoke

This article first appeared on PersonalFN here.

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PersonalFN is a Mumbai based personal finance firm offering Financial Planning and Mutual Fund Research services.

Disclaimer:

The views mentioned above are of the author only. Data and charts, if used, in the article have been sourced from available information and have not been authenticated by any statutory authority. The author and Equitymaster do not claim it to be accurate nor accept any responsibility for the same. The views constitute only the opinions and do not constitute any guidelines or recommendation on any course of action to be followed by the reader. Please read the detailed Terms of Use of the web site.

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