Liquid funds, ultra-short and other low-duration funds 

Returns for these funds have been sliding from a confluence of factors in these abnormal times. We have a detailed explanation here, along with what you should do. To summarise the course of action talked about there:

• If you already hold such very short maturity funds and you do not need the proceeds from these in the next 2-3 months, continue to hold them. The current volatility that’s causing day-to-day losses can resolve once markets normalise.
• If your current bank balance is insufficient to meet expenses or you need the funds if your goal is approaching now, then redeem first from liquid and then from other categories to bridge the gap. Don’t let the recent volatility prevent such action.
• If you’re looking to park money for the short term, use short-term deposits first followed by overnight, then liquid and then from ultra short/money market funds.

Short duration funds

Returns for these funds have also been sliding of late; average 1-week returns for the short-duration category have been negative over the past couple of weeks. The reasons for such slides are similar to that of liquid and other debt fund categories. This apart, short duration funds do tend to see losses in periods such as a week or a month. Taking 1-week returns of these funds over a 3 year period, losses have occurred about 20% of the time even excluding the crisis-hit funds. Therefore,

• If you already hold short duration funds, continue to hold them. These funds require a minimum holding period of around 2-3 years and usually do see some volatility. However, take note of the credit risk in your fund, as some hold lower-rated papers to increase portfolio yield.
• Look at the credit risk involved in your fund – i.e., exposure to papers rated below AA+. If this is above 20% and the fund accounts for over 10% of your portfolio, then consider moving to safer funds. The current climate does not bode well for credit risk. You can look at the 5 to 3 year section in Prime Funds for options.

Credit risk funds

At this time, credit calls are avoidable even if yields look promising.

Subdued growth poses risks to highly leveraged companies with weak balance sheets. Several credit risks have already materialised over the past two years, and a rebounding economy could have alleviated some of the pressure. However, with continued economic slowdown likely in the coming quarters, there could be further deterioration in credit quality. At this time, credit calls are avoidable even if yields look promising. Therefore:

• Exit credit risk funds. You will have to pay capital gains tax on such redemptions. You can phase out your redemptions for better tax efficiency.
• Redeploy these investments in high-quality funds. You can consider the corporate bond funds in Prime Funds’ medium-term category or any fund in the short-term category.
• If you necessarily want to take advantage of high yields, do so in funds outside of credit risk category but with some exposure to high yield papers. This will allow you to snap up high-yield opportunities without taking on excessive risk. For this, you first need nothing less than a 5-year time horizon and the understanding that things can still go wrong. Second, they should not account for over 15-20% of your portfolio. Pick quality funds from other debt fund categories (such as medium duration or short duration) that allocate a portion of their portfolio to low-rated credit. We have already done this exercise and funds that qualify for the above are nested under medium-term and long-term categories listed in Prime Funds.

For all other debt funds – corporate bond, medium duration, dynamic bond, and gilt, continue to hold investments made (this is of course assuming you hold quality funds). Apart from gilt, these categories are also good options for those with a 2-3 year perspective; yields even on AAA-rated corporate bonds are at attractive spreads over gilt especially in an environment of potential rate cuts. You can check the quality of your funds using our review tool.

Arbitrage funds

If you have been holding arbitrage funds for over a year, you can dip into them now for any immediate expenses as they will be tax efficient options to withdraw from.

 These funds, which use derivatives to hedge equity exposure, are also having a tough time of late owing to market abnormalities and lack of hedging opportunities.

• If you have been holding arbitrage funds india for over a year, you can dip into them now for any immediate expenses as they will be tax efficient options to withdraw from.
• If you invested in arbitrage funds a few months ago and you do not need the proceeds immediately, continue to hold them. While recent 1-month returns have been less than 0.5%, longer 3-month returns still hold up. On an average over the last three years, 3-month returns rolled daily have been 1.4%.; 3-month returns now are just over 1%. Once markets stabilise in the coming months, returns could improve.
• If you need money, first consider redeeming any investments in liquid or ultra short funds before dipping into arbitrage funds.

Equity (and hybrid equity) funds

Now is the time for you to exit underperforming equity funds or stocks that you hold. Redeploying this into quality and consistent funds at a time when markets are low can deliver much better.

This includes pure equity funds and hybrid equity funds. Across the board, funds have been hammered in the market volatility. Before anything else, the first thing you should do is to stay put. Don’t panic into selling out equity. Now, here’s what else you can do with your equity investments:

• Rebalance your portfolio to get your current asset/ category allocation in line with your original allocation, or in line with what’s right for your timeframe and risk. If equity is below your original allocation, deploy fresh investments in equity. Shift from debt to equity if you do not have a surplus to invest now. You can use our ‘Nifty levels to invest in’ analysis as a guidepost to make the shift.
• When you add to equity as suggested above, add to your existing equity funds if they are consistent and quality performers. Else, add new funds to your portfolio. You can go to Prime Funds for options. Or you can keep it simple with index funds such as the Nifty 50, the Nifty Midcap 150, the Nifty 500 or a combination of these.
• Rebalancing in line with your original allocation ensures that you do not take more equity risks than you can afford.
• Now is the time for you to exit underperforming equity funds or stocks that you hold. Redeploying this into quality and consistent funds at a time when markets are low can deliver much better. You can use our mutual fund review tool if you want an idea of whether to sell.
• Do not stop your SIPs. Yes, SIP returns right now aren’t that great but a big reason for this is that SIPs started in the past few years haven’t actually had a prolonged correction to average costs down. Now, when the chance to average has emerged, it would be a bad move to stop SIPs. Simply ensure that you are running SIPs in the right funds.
• Make lump-sum investments if you have a surplus and can think long term. Since timing a market bottom is impossible, we used earnings estimates and Nifty 50 price-earnings multiples to mark levels at which you can invest such surpluses, in this article. Either use the funds given in the article or your own equity funds.
• Opt for mid-cap and small-cap funds over large-cap or multi-cap funds only if your investment horizon is 5 years and you can wait for a recovery in such funds. Ensure that your overall allocation to such funds do not cross 25-30% at this time; they may inflate with time.