India-Pakistan Tensions Escalate: What Should Mutual Fund Investors Do

Operation Sindoor: Tensions between India and Pakistan are rising, and D-Street is factoring in the impact. On May 9 indices extended declines as the Nifty fell by over 1 per cent to trade at intraday lows of 23,935.75 and the Sensex declined 1.7 percent to 78,968.34. Notably, the Sensex and the Nifty ended lower by 0.51 per cent and 0.58 per cent, respectively, on May 8 as well.

The decline follows likely panic selling by investors amid rising uncertainty as India responds to Pakistan’s attacks on India. As the stock market factors in the impact, mutual fund investors are left wondering whether they should continue their investments or not. Notably, mutual fund investing is relatively less impacted than direct investment in stocks but ultimately does get impacted by the movement of the overall stock market.

How Markets Fare In Times Of Conflict

Historically the stock market factors in India-Pakistan conflicts by declining on an immediate basis. However, historical data shows that headline indices like the Nifty have managed to bounce back stronger from such declines in a period of six months. In the last five major conflicts between India and Pakistan (Kargil War, Parliament Attack, Mumbai Attack, Uri Attack, and Pulwama Attack), the Nifty witnessed an average decline of 5.57 per cent. However, the index also managed to give returns of 18.27 per cent six months after the date of the conflict.

The Nifty 50 index witnessed its worst decline following the Indo-Pak conflict in 2016 after the Uri Attack. The 50-share index slipped over 10 per cent immediately after the event. However, despite the downtrend, the index managed to surge 4 per cent six months after the event. Even in times of long-drawn wars, the declines seen in the headline indices were temporary in nature, and the indices managed to recover after the event.

What Should Mutual Fund Investors Do?

Investors may feel compelled to sell their mutual fund holdings amid the current correction in the market. However, experts suggest that doing so might not be the best way to deal with the current correction. Dr Ravi Singh, SVP - Retail Research, Religare Broking Ltd told Outlook Money that investors should avoid panicking and continue to stay invested. Singh added that apart from staying invested, investors can also benefit from diversifying their portfolio.

“Amid tensions with Pakistan, investors should not panic and should stay invested. Geographic diversification, higher cash holdings, and exposure to real assets like commodities and real estate offer protection,” Singh said.

Bhavik Joshi, the head of business at Invasset PMS, told Outlook Money that mutual fund investors who invest regularly through Systematic Investment Plans (SIPs) or Systematic Transfer Plans (STPs) can also benefit from rupee cost averaging (RCA) in the current situation. Joshi added that in short-term corrections, RCA enables investors to get more units for the same amount of funds, which in turn reduces the cost of acquiring the funds over time.

“Rupee cost averaging (RCA) is effective in managing volatility during short-term downtrends triggered by rising tensions or geopolitical shocks. When markets fall due to fear or uncertainty, the same SIP amount buys more units of a mutual fund or stock. Over time, this reduces the average cost per unit—ensuring better returns when markets eventually rebound. We’ve observed that short-term corrections, especially those driven by external news or panic, often present ideal opportunities for long-term investors,” Joshi said.

Joshi added that investors should follow a staggered approach when it comes to investing in mutual funds. He added that in unpredictable phases such as the ones caused by rising Indo-Pak tensions, assets can become mispriced. However, investing in a gradual and staggered manner can aid investors in braving short-term volatility while remaining determined to achieve long-term investing goals with their mutual fund portfolio.

“In unpredictable phases like these, even fundamentally sound assets can get mispriced. Staggered investing ensures participation during such corrections while reducing the pressure of timing the bottom. India’s long-term growth story remains compelling. But even in bull markets, there are pockets of turbulence. A staggered approach respects the reality of short-term volatility while staying anchored to long-term goals,” Joshi said.

Singh added that investors can consider diversifying their portfolio by investing in safe-haven assets like gold. He added that the yellow metal can act as a hedge in times of uncertainty.“Investors may consider investing in equities and other assets like gold to hedge their portfolio because relying heavily on a single asset class increases exposure to systemic risks and can undermine portfolio stability,” Singh said.

Joshi added that apart from gold, investors can also consider investing in debt funds or government bonds, which are not linked to the equity market.“Fixed income options like debt funds or government bonds bring stability and consistent income, helping to reduce portfolio swings when equities are under pressure. However, diversification must reflect an investor’s unique risk profile, goals, and time horizon,” Joshi said.

Singh also said that apart from remaining invested and diversifying their portfolio, mutual fund investors should avoid overexposure to negative financial news and avoid speculation in such times and not take impulsive decisions.

”On the psychological side investors are advised to avoid overexposure to negative financial news, which is the main reason to amplify the fear, so stay informed, but avoid sensational headlines that trigger impulsive decisions,” Singh said.