mutual fund investments: Should mutual fund investors buy the ‘entire market’?

The equity market is apprehending volatility as global central banks are about to normalize (read, hike) interest rates. Most discussions these days are around diversification and ways of diversification. The possible ways for diversifying your investments are (a) booking part profits from equity and investing the money in other asset classes like debt or gold (b) shifting to defensive low-beta funds and (c) geographical diversification. The concept of geographical diversification is that you allocate part of your equity investments to another market, where the fundamentals are different from India’s.

Though it may seem that in today’s age of information flow and interconnectedness of markets, all markets would move in a similar manner. But the correlation between markets is low. If we plot the returns calendar-year-wise, returns from the Indian equity market will be different from that of the USA, which again will be different from China or Europe. The reason is, fundamental factors, demand-supply aspects, etc., are different.

Talking about the biggest equity market in the world, in terms of market capitalization and the largest economy in terms of GDP, is the USA. One concern may be there: when the US Federal Reserve is about to hike interest rates and reduce the surplus liquidity in their system, there would be an adverse impact on the equity market. While theoretically, that may be the case, the arguments for investing are (a) the fact that US Fed is hiking…