Focus On Time In The Market

Hemant Rustagi
Chief Executive Officer, Wiseinvest Advisors

The economic turmoil due to the virus pandemic has hugely impacted the stock markets. In fact, the last three months have perhaps been the most challenging ones that equity investors could face during their lifetime. A steep fall of around 40 per cent witnessed by the Indian stock market from its peak in mid-February has left investors gasping for breath. Needless to say, the market downturn has severely impacted the portfolios of equity investors, compelling them to think whether their asset allocation and investment strategies require any realignment to get their investments back on track.

Even those investing through SIP over the last five years or so have panicked on seeing returns turning negative. Thankfully, the stock market recovered sharply from the lows on March 23, 2020 and provided some respite to distraught investors. However, there is still a lot of ground to cover for the benchmark indices to move back to their pre-pandemic levels. The patience and perseverance of investors will be put to test during this difficult journey. There is no doubt that the stock market will eventually recover but only those investors who keep their faith in equity as an asset class, ensure the right mix of exposure to different market-caps in their portfolios and continue to follow a disciplined approach are likely to gain the most. 

Hence, investors must keep their focus on their investment goals and time horizons to achieve each one of them. The sharp fall and the subsequent recovery highlight not only the vagaries of the stock market but also the fact that it is almost impossible to predict short-term movements. While ideally every investor would like to invest when the markets are down and exit when the markets are high, even the most experienced fund managers find it difficult to do so successfully on a consistent basis. That’s why it is important to focus on time in the market rather than trying to time the market.

In fact, for investors who are sure about their time commitment, a current market like situation provides an opportunity to realign the portfolio in terms of allocation to different market-caps of the stock market. Although large-cap stocks have been leading the recovery process and are likely to remain at the forefront going forward too, one shouldn’t undermine the importance of having a reasonable exposure to mid and small-cap stocks in the portfolio.

Ideally, for a long-term investor, exposure to large-caps should be in the range of 50-60 per cent. The exposure to mid-caps should be around 30 per cent and the remaining can be allocated to small-caps. However, maintaining this allocation over a longer period can be quite tricky for most investors. Investing in quality multi-cap funds can help investors transfer this responsibility to fund managers who have the flexibility to realign the allocation to different market segments without any tax implications for them.

Of course, there can always be a risk of a fund manager either becoming more aggressive or conservative than what may be suitable for you as an investor. Thankfully, a careful analysis of long-term performance of a fund brings out the level of consistency, both in terms of allocation to different market segments as well as performance. So, if you have been investing in a mix of large, mid and small-cap funds, you must have a close look at the composition of your equity fund portfolio. If allocation to either a segment or segments is disproportionately lower or higher, take immediate steps to realign it to create the right balance between risk and reward. However, don’t allow short-term performance alone to be the key influencer in your process of realigning your portfolio. Keep an eye on your risk profile and time horizon as both have an important role to play in deciding your risk-taking capacity.

Another important aspect that requires your attention is investment strategies of different funds in your portfolio. Although mutual funds are diversified by nature, some exposure to funds following a focused strategy can improve your chances of earning higher returns. The good thing about focused funds is that they are usually well-diversified in terms of sector exposure and that allows you to offset higher risk on account of concentrated bets at the stocks level.