The stock market has seen great volatility in the last few quarters. Even though the Nifty hasn’t dipped significantly, it is because a few stocks with high market capitalisation are sustaining their higher valuation.
There is also an ongoing debate about whether this slowdown is cyclical or structural in nature. Nevertheless, the fact remains that this is going to hurt investors. We have already seen auto sales falling by 30%, GDP growth coming down to 5% and consumption slowing down by 15% or more.
So, amid this weak economic outlook and a volatile stock market, how should you manage your mutual funds? We’ve some tips for you which you might find helpful.
Take A Comprehensive Look At Your Portfolio
You enjoy the fruits of returns when the market reaches new heights. However, when the market dips, like in the current times, it’s a good time to evaluate your fund portfolio and rejig your investments if required. Look at the types of mutual funds in your portfolio and analyse their returns in the last 3 years. If your existing mutual funds are making more losses than its peer schemes of other companies, it’s possibly time to have a serious look at your equity mutual fund holding and rejig the holding.
Rebalance Your Portfolio
When the market slows down, your equity mutual funds may lose a part of the returns. However, debt funds generally do not face such drastic fluctuations in return. Even when there is a market slowdown, some debt funds such as liquid funds can provide returns of around 6% to 7% p.a, while longer-duration debt funds can provide double-digit returns during periods that interest rates fall. Also, gold funds increase in value because investors look for safe assets when the market turns volatile. Hence, the best way to manage slowdown is to reduce your equity proportion and increase the debt proportion through portfolio rebalancing. The share prices are battered by more than 30% in many cases. This directly impacts your returns from equity mutual funds.
In the case of debt fund investments, the return is more predictable. Debt holders have first right on the company’s profit. As such, even when profit reduces, the companies usually pay to the debtholders. Moreover, government bonds, fixed deposits and high-grade corporate bonds typically do not default on their payment.
Keep Cash Handy For Emergency
A part of your savings should be kept in cash or liquid form (like saving accounts) which can be withdrawn on demand in case of any emergency. The key is not to be “fully” invested any time. The problem with keeping all your money invested in a downing market is that you will have to redeem them at the most inopportune time in case of an emergency. This will result in significant capital erosion.
Invest In A Dynamic Fund
Dynamic funds are mutual funds that invest in different assets (debt and equity) in varying proportions. The valuation of the market decides the share of portfolio assets. So, when the market peaks and there is not much scope of growth, the dynamic funds automatically reduce the proportion of equity funds and increases the ratio of debt funds. Similarly, when the market becomes attractive for equities, the dynamic funds increase the proportion of equity funds and reduce debt funds accordingly.
Don’t Stop Your SIPs
Systematic Investment Plans (SIP) are a disciplined way of investing. They also work on the rupee cost averaging principle, which balances the impact of fluctuations in the stock market. So, unless you can find a better option, it is better to continue with the SIPs in funds which have been in the portfolio for a long time. When the market goes down, the same SIP amount can buy more units of mutual funds. Hence your units will increase rapidly in the time of slowdown. When the market recovers and starts going up, your investment value will rise too.
The economic slowdown is a reality, and many countries are facing similar challenges. Stock markets go through the cycle of boom and bust. So, businesses essentially move in a cycle. They have a bullish time where the market goes to irrational heights and they suffer from the bearish period when the market comes down heavily. An investor cannot impact the business cycle. However, they can take a few steps, like the ones we have mentioned above, to reduce the impact of economic slowdown on their investments.
The author is CEO, BankBazaar.com