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In an interview with Money9, Sorbh Gupta- Associate Fund Manager Equity, Quantum AMC, explains the best course of action the equity mutual fund investors should take while investing.

Sorbh feels the market is not factoring any of the risks that could be played out if Covid-19 third wave breaks out.

Edited excerpts:

Q: What has been the recent trend of Equity Mutual Fund currently?

Sorbh: In the past 8 to 9 months equity mutual fund schemes exhibited outflow. It was driven mainly by two reasons; the first one was that everybody felt that the economy is generally not doing well and the markets could have second fall in the prices after the March 2020 prices fall. So, I think that was the reason investors were trying to pull away the money from the equities but despite that, markets have kept up moving up.

So, the trade and the strategy that investors were playing of taking out cash and redeploy it at a lower level has not played out for many investors. Secondly, there is the possibility that in the initial year due to lockdown, people’s cashflow in terms of salary and job loss could have gone down and also they have withdrawn money to keep it handy for safety and emergency purposes. This also led to equity mutual fund redemptions.

However, currently over the last two-three months, there has been some positive news like the government is going to spend a lot of money for the growth of the economy. II think people are more confident about their cash flow situation despite the second wave of Covid -19.

Q: How should one select a scheme as a fairly new investor in an equity mutual fund?

Sorbh: As far as the new investors to they should start with systematic investment plans (SIPs) as it is a good way considering the markets are on the higher side at present. Although the trailing multiples we see are of 30-40 times that is not the relevant price to earning (PE) metrics to look at because there is a one quarter of missing earnings during the last year lockdown and also there could be some pressures on the earnings.

So, this was not the normal earnings and the PE multiples will look inflated. Even if I adjust the multiples markets are still on the expensive side so new investors have to be very careful while selecting a mutual fund. That said, companies are showing resilience towards the second lock-down. Companies which we had interacted have said that things are not as bad as it was with the previous lockdown.

Our senses are that the larger companies are better placed and one can see troubles in the mid and small-cap companies as these stocks have rallied and investor has to be a little more careful under this space.

SIP remains the best approach to invest in large caps as larger companies with good balance sheets have survived better. So, SIP is the preferred vehicle and one should look at the opportunities into large-cap equity funds.

Q: How one can review their own mutual fund portfolio during such times?

Sorbh: As an investor once the selection is of the mutual fund scheme is done, your review process gets easier. Also, when it comes to the selection of good mutual fund schemes investors should opt for a scheme that is backed by strong management because often investors get stuck when the fund manager is changed.

The best thing to review under the mutual fund scheme is to see what investors want and whether it is matching with the fund management strategy or not.

Also, one crucial thing to review in the portfolio for the mutual funds is that in the falling market how much the net asset value has fallen and in the rising market how much it has gained. This will give the idea of how volatile is the portfolio vis-à-vis the market. Ideally speaking if better mutual fund scheme should fall less. These are the aspects one should look at while selecting the fund.

Q: What is your view on the equity mutual fund outlook for the next coming few months?

Sorbh: Ideally when it comes to investment say 6-7 months is not the time horizon that one should actually look at while investing in mutual funds. Investment in equity mutual funds should be for more than 3 years. Over a long-term period, equity mutual funds have given a good return as an asset class.

However presently, the market is not factoring in any of the risks that could be played out in case of the third covid wave or the earnings disappointments for the first quarter because of the second wave lockdown. So, there is the possibility that can happen. The only suggestion would be to continue SIPs and when there is a sharp fall in the market, the investor can use it to deploy more equity investments in their portfolio.