Time for caution in investments

Current Picture

A picture is worth a thousand words. The chart shown below, speaks tell-tale stories of Mutual fund equity investors. Investors are continuously exiting equity mutual funds for the last 3 consecutive months. But, why? The answer is caution. Yes, it is time for caution in investments, not only mutual fund equity, but most of the common type of investments. Read on, let us try to understand it better.

Source: Financial express dated 10^th Sep 2020

Black swan

Enough is written about black swan event. Yes, it refers the Pandemic, but till date black swan has neither become white not brown, it is still black swan. Day by day the black is becoming murkier and darker and very difficult to know the true colors.

Then and now

In March 2020, Mutual fund managers and experts in TV Channels had the opinion that things will get resolved in one or two quarters. As on date, we are in the middle of September, but the clarity is eluding. Now the same experts are trying to comprehend the developments and to come in terms with blunt realities. Now everyone is trying to understand the current realities and to project the most meaningful future scenarios. Most of analyst and credit rating agencies predicted Indian GDP for FY 20-21 to be around -1 or -2 in the beginning of March 2020, now it is being revised in SEP 2020 to more negative in the range on GDP contraction of 11-17%

These ghost like picture is haunting not only the fund managers, the investors, the governments, the bureaucrats across whole spectrum of people. In this backdrop markets moved from March lows of Sensex 25k to 39k recently. It is spectacular dream run for the markets in any standards. Most believe, the easy money and global liquidity pumping by central banks across the globe has driven the market upward. Is this sustainable really? I do not know. I am sure most of them in the large will agree with me.

Recovery Model K

During the last 6 months many theories were proposed about market and economic recovery models. Some say it is V shaped, another school of thought is L or W shaped recovery. Most of the English alphabets were used but hold on, now new models are being emerged within the analyst communities and the new letter given for their recovery model is... hold your breath... it is K. What they mean by K is nothing but one section of the companies will go in upper slope and other section of the companies will go in a downward slope hence the letter K is being used for recovery models. Let's take an example of Reliance, the share place was around Rs 800 in March and currently Rs 2000+ in September, undoubtedly Reliance is in upward slope. Whether all companies are in upward slope? NO. On the other hand, most of them are in downward slope. This is the hard reality of current time. Another observation is, market was at 39,000 before pandemic and market is again back at 39,000 as of now. In this case Mutual fund scheme NAV’s change should be zero or near zero. Reality except handful of exceptions most of the schemes are in deep red. Despite market reaching previous values most of the equity investors and mutual fund investors are losing money. K model recovery theory goes well here. Only few companies in their scheme portfolios are going up whereas a lot of other companies in their portfolio is dragging the NAV, hence the result. The investors are not making money despite the market is back at 39,000.

So now it is very clear that only very few companies, the blue-eyed boys of the market are in the upward slope, example Reliance. Other bulk of the companies are in their downward slope, example banks and NBFC’S. The upward slope and download slope are not going to be equal and it is not going to be perfect alphabet K. The expectation is the upward slope is going to shorter and downward slope is going to be longer.

Going forward

With this K recovery model in place and with our knowledge of Black swan, events are unpredictable (with this caveat), we will try and crystal gaze the future.

1. Invest in equity only if you are having the capacity to identify blue eyed boys and hand pick select companies which will go in the upward slope in the next 2to 3 years. (Keep in mind this maybe a challenge, even for seasoned market operators)

2. If you are an average investor not having the capacity to take risk, it is better to keep away from the markets i.e. direct equity as well as equity mutual funds.

3. Using the opportunity is different, taking undue risk is different. Let us understand this very clearly. Unless risk taking is in your nerves, do not take undue risk in this market.

4. You will get penalized or punished heavily if the call you have taken goes in the wrong way.

5. Most probably equity is not going to give any decent return in near future. This is the time for caution, understand the risk and then invest.

6. In general, as told in the beginning the Black Swan event is still in progress, until the clarity emerges, be careful in your investments in equity / debt /real estate etc.

SIP

Nowadays a lot of people are doing SIP in mutual funds. Now most of them are at crossroads whether to stop or continue SIP in these difficult circumstances. Is there way out? Read on to know.

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