Options of a fund manager


A professional who has made investments from his hard earned savings is not too happy with the performance of his equity portfolio. He had invested with conviction as he strongly believed that the economic growth witnessed by the country in the last three years would be sustained in the future as well.

However, today he is stunned and disappointed with the stock market movement. He is considering switching from investing directly in equity to investing through mutual funds. However, before doing so, he would like to know how mutual fund managers cope up with these kinds of market falls.

Gloomy Outlook:

The professional’s concerns are not misplaced. In less than one month, the Sensex has witnessed a massive plunge of approximately 3,500 points or 28%. Companies, across sectors and market capitalizations have witnessed a huge drop in their share prices. Further most of the industry pundits opine that the markets are unlikely to stabilize and may in fact further move downwards in the near future.

Mutual Funds NAV in market fall:

Equity oriented mutual funds have more or less witnessed a similar fall in their Net Asset Values (NAV). However, depending on the investment strategy being followed by each scheme’s fund manager, the magnitude in the NAV erosion differs from scheme to scheme.

Tackling market volatility:

With uncertainty becoming a part and parcel of Indian stock market, it has become imperative or the funds managers to tackle the market volatility successfully. However, opinions differ when it comes to the investment strategies.

Investment alternatives suggested during a market fall:

1. Waiting on the Fence: A few fund managers are taking a cautious outlook to the future stock market movement. Since, there are diverse opinions floating around as to whether the market will move up or down, the fund managers are increasing the cash component in the scheme’s overall portfolio and are waiting for the markets to stabilize before undertaking any investment decision. For instance, Sundaram BNP Paribas Mutual Fund has increased the cash levels in their schemes given the recent correction and volatility in the equity markets. Their plan is to continue keeping a close eye on the valuations of the sectors and the stocks and increase exposure in those stocks that appear currently undervalued in relation to their growth potential.

2. In this strategy it is possible that the fund manager may miss the opportunity of buying stocks which are presently available at lower levels. However, many could find this cautious approach to equity investments suitable in the current market scenario.

3. When markets are spiraling downwards, it has been seen that large caps are more liquid and the erosion in their share prices is much less vis-à-vis the small caps and the mid caps. However, small caps and mid-caps offer good returns once the market bounces back.
4. Investing in Large caps is a much better option in the current market scenario. If the small and the mid caps are completely ignored then you may miss the upside that they provide. Hence it is necessary to have a small portion of small caps and mid caps in the portfolio.

5. The investments should be planned giving due importance to the scheme’s asset allocation, risk level and the investment objective. Therefore, based on the above parameters, small caps and mid caps can be a part of one’s investment plan.

6. Hedging through Futures and Options:
By using derivative instruments such as futures and options, several diversified mutual funds are aiming to use the market volatility to their advantage and curtail losses. A few equity schemes of Kotak have an exposure of around 10% of the scheme’s total corpus in futures and options.

In conclusion the above mentioned investment strategies aim to mitigate losses. However, only time will tell which one of them was most successful.