Equity Markets Crash Amid Trump’s Tariff Wars: What Should Mutual Fund Investors Do Now

Furthermore, individualised reciprocal high tariffs are imposed on countries with which the US has the largest trade deficits, while other nations remain subject to the original 10% tariff baseline, effective from April 9, 2025.

Unsurprisingly, several countries, including China, Canada, and the European Union, have announced 'retaliatory tariffs' against the U.S.

China retaliated on April 4, 2025, by announcing an additional 34% duty on all US imports. Trump as a counter has nearly doubled the duties on Chinese imports to 104%.

While the European Union has shown an inclination towards negotiation, it has also struck back with a 25% tariff on some US imports.

Trump's protectionist moves and retaliatory actions from other economies have heightened fears of a full-blown trade war. There are high chances that the U.S. may slip into a recession, supply chain being disrupted, inflation may fasten, global trade being impacted and all of this weighing on global economic growth in time to come.

Major stock markets worldwide have been left bleeding with the uncertainty surrounding the tariff war and its implications for the global economy.

On April 7, 2025, the BSE Sensex and Nifty 50 plummeted over -5%, marking one of their worst falls since the COVID-19 pandemic market crash of 2020. Equity investors witnessed a staggering Rs 16 lakh crore wipeout in market value, resulting in the sharpest intraday fall since June 2024. All three major US indexes, S&P 500, Dow Jones, and Nasdaq touched their lowest levels in more than a year in early trade.

In the two days immediately after Trump's tariff announcements, the S&P 500 fell -10.5%, wiping out approximately USD 5 trillion in market value and marking its steepest two-day loss since March 2020.

Other Asian and European indices have also not been spared. Hong Kong's Hang Seng Index was the worst hit as it closed -13.2%, while Shanghai, Tokyo, and Seoul equity markets plunged more than -5%. The UK's FTSE 100, Germany's DAX, and France's CAC 40 fell more than -4%.

The bleak impact of Trump's protectionist trade policies is evident in the fall in major global indices since his inauguration on January 20, 2025:

The Road Ahead for the Indian Equity Market

Well, brace for intense volatility and turbulence ahead in the equity market in the short to medium term.

India's Volatility Index (VIX) -- a measure of volatility and known as the fear gauge -- has surged nearly 65% to approximately 22.8 (as of April 8, 2025) since Trump's reciprocal tariffs came into effect.

As seen in the graph above, the VIX spiked soon after Trump's victory. The current VIX reading is higher than the 5-year average of 18. The surge reflects growing concern in the Indian equity market.

Apart from the US President's mercurial policies, the Indian equity market is also considering the headwinds from various other global and domestic factors, including the ongoing Russia-Ukraine war, Israel's military operations in Gaza, the increasing risk of geoeconomic fragmentation, the upside risk to the inflation trajectory, and the looming possibility of an economic slowdown.

Investment Strategy to Follow Now

The Indian equity market has corrected, and valuations are down, it cannot be construed as cheap yet.

Currently, the trail Price-to-Equity (P/E) ratio of the MSCI Index is around 22x, while that of the MSCI Emerging Markets Index and MSCI World Index trail P/Es are around 15x and 21x (as per the latest factsheets as of March 2025). Even on a 12-month forward P/E, the MSCI India Index with a P/E of nearly 21x is commanding a noticeable premium vis-a-vis the world and emerging markets that are around 18x and 12x, respectively.

Now while some may justify the premium that Indian equities command relative to global peers as India is the fastest-growing major economy (at the fifth spot in nominal GDP terms), the margin of safety, particularly in the mid-caps and small-caps is not very comforting.

The P/E ratio of mid and small-caps (popularly known as SMIDs) is still around 30x. SMIDS have so far corrected over 20% since their peak. Given the headwinds in play SMIDs would be more vulnerable than large-caps.

You see, earnings have to ultimately justify the valuations. In Q3FY25 there were more misses than hits in India's corporate earnings. Many companies have missed meeting street expectations, and now there are more earning downgrades than upgrades. At present, the dichotomy between corporate earnings growth and India's GDP growth is very much apparent.

It is important to approach Indian equities sensibly by following prudent asset allocation that is best suited for you, take calculated risks, and tread cautiously - and not go gung ho.

Going forward, as the market corrects one may be able to find value. So, practice prudence and invest in a staggered manner.

In the current turbulent market environment, it makes sense to follow the "Core & Satellite" approach to invest in equity mutual funds now. It is a strategy followed by some of the most successful equity investors around the world.

The term 'Core' refers to the more stable, long-term equity holdings within a portfolio. Accordingly, the core portion (65%-70%) of your equity mutual fund portfolio should primarily consist of some of the Large-cap Funds, Flexi-cap or Multi-cap Funds, or Value/ Contra Funds. These can add stability to the investment portfolio while potentially steadily multiplying your wealth by keeping an investment horizon of at least 5 years.

The satellite portion (30%-35%) of your investment portfolio, on the other hand, may include a couple of the best Mid Cap Funds (investment horizon of at least 6-7 years) and an Aggressive Hybrid Fund (investment horizon of around 5 years). Given their risk-return characteristics, these funds have the potential to boost your portfolio's overall returns.

At this point in time, it would be wise to avoid adding Small Cap Funds to your satellite portfolio, unless you are a very aggressive investor with a very, very high-risk appetite, have a clear understanding of these funds' portfolio characteristics, and have the willingness to stay invested for at least 7 years or more.

Sectoral and Thematic Funds call for an even more cautious approach. Several sectors such as metals (steel and aluminium), jewellery, textiles, healthcare, auto, and electronics, among others, will be impacted by Trump's tariff tantrums. Although sectors/goods such as pharmaceuticals, semiconductors, and certain minerals have not yet been targeted, future policy shifts could bring them under pressure.

At present, the investment risk is very high in sector & thematic funds. It could make returns from sector-specific funds highly unpredictable in the short to medium term.

Review and Rebalance Your Mutual Fund Portfolio

A vital step in navigating market volatility is to regularly review and rebalance your mutual fund portfolio. A portfolio review helps assess whether your current asset allocation continues to align with your envisioned financial goal/s and evolving risk tolerance.

If your mid and small-cap holdings have underperformed significantly or the market downturn has made you more risk-averse, you might want to shift some investments towards more stable assets like large-caps.

Reviewing your asset allocation would also help assess whether your portfolio is well-diversified across different asset classes, such as equities, bonds, and other investment avenues.

To Conclude...

While Trumponomics 2.0 and its impact on global markets can be unsettling, it is important not to let short-term volatility faze your long-term goals.

Ensure that your mutual fund portfolio is well-diversified and in line with your personal risk profile, your investment objective, the financial goal/s you are addressing, and the time in hand to achieve those goals.

Apart from equities for wealth creation, also allocate sensibly to debt and fixed-income instruments, as well as gold. Adequate, prudent exposure to these two asset classes can help bring stability to your portfolio and offer some protection when equities undergo turbulent times.

Be a thoughtful investor.

Happy investing!

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Disclaimer: Investment in securities market are subject to market risks, read all the related documents carefully before investing.

This article is for information purposes only and is not meant to influence your investment decisions. It should not be treated as a mutual fund recommendation or advice to make an investment decision in the above-mentioned schemes.