The benchmark Sensex and Nifty have plunged more than 7 percent this month. Given the risk-off sentiment globally, May is likely to turn out to be the worst month for stocks since March 2020, when markets crashed in the immediate aftermath of the pandemic outbreak. However, market experts say it is important to continue investing now.
In the last 24 months, domestic markets have generated negative returns only eight times, also not exceeding 4 percent. Although the indices witnessed several episodes of correction, they managed to recover.
Market pundits say that if the ongoing correction drags on, this will be the first major test of patience and resilience for domestic investors, who have consistently invested in stocks through mutual funds (MFs) or directly.
Investment experts say that given headwinds such as tight liquidity and uncertainty about earnings growth, markets will remain volatile. They believe that investors would be better off entering the markets gradually and should not invest large sums all at once.
“Among several critical issues affecting equity markets, rising government yields and the impact on economic growth have taken on added importance. Therefore, equity markets could show increased volatility until these factors abate and greater clarity emerges about their impact,” says Anoop Bhaskar, director of equities at IDFC Asset Management Company (AMC).
In the past month, the S&P BSE Sensex is down nearly 10.23%, while the S&P BSE MidCap and S&P BSE SmallCap are also down 14.81% and 16.35%, respectively.
Foreign portfolio investors (FPIs) have withdrawn $3bn from domestic stocks this month, taking their year-to-date sales tally past the $20bn mark.
Much of these outflows have been offset by purchases by domestic investors. Sustained flows into MF equity schemes have given fund managers the ammunition to invest in the markets.
Equity funds posted net inflows of Rs 78,946 crore between January and April, according to data from the Mutual Funds Association of India (Amfi).
Trideep Bhattacharya, chief investment officer for equities at Edelweiss MF, says the short-term outlook is volatile, while the medium-term outlook is constructive. “We expect markets to remain volatile until we get clarity on factors like early signs inflation is peaking, an accurate indicator of the path of interest rates globally, and bottom-up green shoots. above the capex cycle,” he said.
Equity funds have also seen their returns hit by the correction in Indian markets. On average, large-cap funds have generated returns of -9.39 percent in the past month. Performance was worst at mid-caps and small-caps, where average returns fell 11.71 percent and 13.50 percent, respectively.
Market participants say staying invested in the markets is more important now, as such an approach will ensure full upside participation, while not limiting downside risk.
Sorbh Gupta, Equity Fund Manager at Quantum AMC, says: “These macro challenges, market cycles come and go several times in an investor’s journey to reach financial goals. One should not get too carried away. Investors should stick to their asset allocation plans and use a phased approach to increasing equity allocation.”
Most fund managers say they are optimistic about market opportunities from a medium- to long-term perspective as the domestic cyclical recovery takes shape and corporate profits return to an upward trajectory after adjusting for inflationary challenges.