Is it time to invest ‘more’ in equity mutual fund schemes?


Equity market

“Be greedy when others are fearful.”

This incomplete quote of Warren Buffett is doing the rounds in the mutual fund circles these days. The Oracle of Omaha’s complete quote, perhaps one of his most famous one, is: Be fearful when others are greedy. Be greedy when others are fearful. The quote, according to many market pundits, encapsulate Buffett’s investment philosophy. Simply put, it cautions investors against getting carried away by the market sentiment, and stay focused on value-oriented investing.

However, some mutual fund advisors are using the quote to communicate to their clients that since everyone is pessimistic about the market at this juncture, probably it may be the right time to go for bottom fishing. Many mutual fund managers have been voicing similar sentiment in the recent past. They believe that there are pockets of attractive buys after the recent fall in the market. Does that mean investors should invest more in equity, as these mutual fund advisors say?

Well, do not share the view. We believe that investors should stick to their original investment plan or asset allocation plan if they have one. Your investment decisions should not be based on the prevailing conditions (ups and downs, in other words) in the market.

Don’t get us wrong. We understand what these mutual fund advisors are trying to say. However, most investors get it wrong. What these advisors are trying to tell their clients is if they have extra money lying with them that they do not need for a long period, they may consider investing in equity mutual funds to exploit the current scenario.

In investment parlance this extra allocation is called tactical allocation. Simply put, it means allocating more to an asset class whenever there is a sharp correction to maximise wealth. Well, has the market corrected sharply enough to warrant extra allocation?

It is never easy to take a call on the market. You would never be 100 per cent sure whether the market has corrected sharply or more pain is still left. That is why some investment pundits say a 20 per cent correction is good enough to make a tactical allocation to equity. Only a few indices like auto, metal, and small cap have witnessed a sharp correction of more than 25 per cent in the last one year. Mid cap index also comes close with 17 per cent correction. Most other indices are down only marginally in the last one year. Clearly, most indices do not qualify to make extra allocation at this point.

There is another problem: even those sectors or segments that have sharply corrected may still see some pain. Look at auto sector, for example. A raging debate is going on whether the government intervention would help revive the future of the sector. Similarly, nobody is sure whether small cap segment is going to bounce back completely. Most experts believe that unless the economy is out of woods completely, the segment is likely to witness more pain. And there is a big question mark on the revival of the economy as nobody is sure about the action plan of the government.

To sum up, this is not the time to be greedy. You should tread cautiously in the current market because many unanswered queries are likely to haunt the stock market in the coming days. So, stick to your investment plan. Don’t deviate from your goal-based investment strategy.


Written by Loknath Das