Should Mutual Fund Investors Worry About Partial Lockdown?

Maharashtra, which houses the financial capital of India - Mumbai and other major districts such as Pune, Thane, Nagpur, and Nashik, continues to be the epicentre of the infection with cases accounting for around half of the fresh cases recorded in the country in the past couple of weeks. The massive surge in cases has forced the state government to impose 'Weekend lockdown' along with 'Night curfew' on weekdays, as well as ban on gatherings of five or more persons till April 30.

While the restrictions mean prolonged impetus on Work-From-Home and Study-at-Home scenario, it also means delayed and bumpy recovery for the economy. Certain sectors like Restaurant, Hotels, Tourism, and Aviation may be at the most risk.

The impact is already visible with shops and establishments selling non-essential goods/services being shut and migrant workers moving back to their hometowns.

Notably, the restrictions have come ahead of festivals such as Gudi Padwa, Chaitra Navratri, the holy month of Ramazan, as well as the wedding season, which are important events from the point of view of various business activities that were expected to boost demand. But with pandemic restrictions in place, consumption growth that was slowly emerging out of the crisis is likely to suffer again.

Maharashtra alone accounts for 10% of India's annual $850 billion retail market (according to estimates of Retailers Association of India) and contributes around 13.9% to India's GDP (highest in the country).

Therefore, the strict restrictions and rising cases pose a big threat to the economy. According to CARE Ratings, "Looking at the ramifications of the restrictions put in the state, the 'radical' lockdown decision taken by the Maharashtra government will have an economic impact of Rs 40,000 crore. This will lead to a decline in Gross value added (GVA) growth by 0.32% at the overall domestic economic level".

The situation in other parts of the country is grim as well and we will likely see increasing restrictions in other states in the coming days. Many states/UTs such as Chattisgarh, Odisha, Karnataka, Gujarat, Delhi, etc. have already announced Night curfew and/or region-specific restrictions.

Impact on your investment

The S&P BSE Sensex has witnessed high volatility over the past few days and continues to trade range-bound levels as investors weigh the impact of the second wave on corporate earnings. It is important to note that experts are ruling out nationwide lockdown restrictions due to the following reasons:

1) Health infrastructure is better equipped to handle the situation than it was in the early stages of the pandemic.

2) The pace of vaccination drive is picking up.

However, if the infections continue to rise and restrictions persist, corporate earnings may take a hit and that could pose a downside risk to the market.

Equity markets are currently trading at expensive valuations and in absence of growth in demand and delayed economic recovery, there could be higher volatility in the near term with some consolidation.

Many equity mutual funds have seen a significant improvement in performance in the last one year when the equity market recovered from the pandemic-induced market crash. But given the near term uncertainties, it is important to have realistic returns expectation from mutual funds.

What should investors do?

While many actively managed equity mutual funds may underperform over the short term, the long term track record is encouraging. As we can see in the table above, most mutual funds efficiently managed to protect the downside risk in the recent market crash when compared to the respective benchmark indices, while the returns in the current recovery/bull phase are reasonable. Remember that a consolidation in the market allows fund managers to pick quality stocks at attractive valuation to reward investors over the long term.

So if you are investing for a long term goal (that is at least 5-7 years away), near term uncertainties should not worry you. Instead, you can look at it as an opportunity to reassess your risk profile and rebalance your asset allocation if necessary.

In the current scenario, ensure that your portfolio is well diversified across worthy schemes in various categories and investment styles such as Large-cap Fund, Multi-cap/Flexi-cap Fund, Mid-cap Fund, Aggressive Hybrid Fund, Value Fund, etc. depending on your investment objective and risk profile.

It can prove beneficial if you opt for the SIP mode of investment to invest regularly in equity mutual funds. If the market corrects, you will be able to accumulate more number of units for the same investment value and benefit from the higher growth in value when the market rises again. Staggering your investment via SIP will help you average out your investment cost and aid in reducing the impact of volatility.

That said, if your financial goal is nearing or if you are a conservative investor, it would be better to gradually shift allocation to safer avenues like debt mutual funds. But here too ensure that you select schemes carefully by prioritising the safety of principal over returns. Invest in schemes that have higher allocation to government and quasi-government securities that are highly liquid and carry low credit risk.

Furthermore, at present, the interest rate risk is higher for funds having higher allocation to medium and longer maturity instruments. Thus for an investment horizon of up to a year, you would be better off investing in short term funds like Liquid fund and Ultra short duration fund. For a longer investment horizon, you can consider investing in prudently managed Banking & PSU Debt Fund and/or Dynamic Bond Funds.

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Warm Regards,
Divya Grover
Research Analyst

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