The way out
Stick it out: For most investors, financial advisors suggest that they should not react to the situation and instead just ride out this period of volatility. "You would have entered these scheme with a 5-10 year investment horizon, so stick to it. In the long run, many of them do have the potential to beat the indices," says Anil Rego, chief executive officer, Right Horizons.
Run a few checks: The current setback should, however, prompt a review of your strategy, fund and portfolio. First, check whether you have the risk appetite for an allocation to mid- and small-cap funds. If the current bout of volatility has made you realise that you have a much lower level of appetite for volatility than you had previously imagined, then reduce your allocation to the mid- and small-cap segment. Broadly, depending on your risk appetite, you should have a 60-70 per cent allocation to large caps, 20-30 per cent to mid caps, and 10-20 per cent to small caps.
If a review reveals that your portfolio is too heavily concentrated on the mid- and small-cap segment, reduce allocation to this segment to a level that your financial advisor thinks is suitable for your risk profile, and allocate more to the large-cap segment.
Also, scrutinise the performance of your fund. "The scheme you have invested in should have declined in sync with its benchmark. If the fall was steeper, that would call for a close scrutiny of the fund," says Vivek Banka, founder, Alitore Capital. In fact, times like these are a good test of the quality of schemes.
"It is in trying times like these that the quality of the underlying portfolio comes to the fore. In the mid- and small-cap segment also, there are companies that are market leaders, have strong balance sheets, low debt-to-equity ratios, and high free cash flows. Those stocks, and hence the schemes that invested in them, have suffered less," says Ajay Bodke, CEO and chief portfolio manager, PMS, Prabhudas Lilladher.
Check if your fund manager stuck to quality stocks or got swayed by momentum and bet even on those having poor fundamentals. "If your fund manager has a sound long-term track record, that too should give you the confidence to stick to the fund," says Majumder.
If you do decide to exit a scheme, be mindful of exit loads and tax impact. Many AIFs have closed-end structures. In case of PMS, different stocks may have been purchased at different points of time, so assessing whether they qualify for long- or short-term capital gain may prove complicated.
Be mindful of the positives of PMS and AIF schemes before you decide to quit in a huff. "PMS scheme allow investors to speak to the fund manager. Take advantage of this facility. If his explanation appears logical and convincing, stick to the fund," says Dhawan. You also have much less to worry about if you are in a scheme where the fee is not flat but depends on profit sharing. "This alignment of interest means that you are better protected in such scheme than where the scheme charges a flat fee irrespective of performance," says Ankur Kapur, founder, Ankur Kapur Financial Advisory Services.
Finally, bear in mind the concept of reversion to mean. "After their fantastic run since 2014, this correction was par for the course. But if you stick to these funds, their performance will turn around in due course," says Banka.