Mutual funds are market-linked investments and are subject to market risks, also the market is not consistent, and its performance does fluctuate, sometimes it outperforms and goes up, sometimes it crashes down. We should be aware that mutual funds are partly affected by fluctuated the market’s performance.
The market risk association in mutual funds’ returns, is the main reason, why the investors are always advised to analyze their risk holding capacity and choose their investment tenure accordingly before investing in mutual funds. People often ignore their risk tolerance, get attracted to the calculated returns, and start their investment.
Everything goes well, till their fund performs well, and give positive returns, but things turn upside down when the fund's returns are affected due to market recession. Investors get nervous, and to prevent their loss, they redeem their funds in the bear market condition. The outcome is, they get very low returns and sometimes they end with a loss.
Well, redeeming your funds, at the time of recession or bear market, is never a good idea, rather than redeeming, there are many ways or strategies through which you can save your mutual fund investments at the time of recession. Let us discuss some of the ways:
1. Recession is not a time to stop your SIP (Systematic Investment Plan)
Discontinuing your SIP, during a recession, can be the biggest mistake. At the time of starting your SIP plan, if you had enquired about, SIP comes along with a feature, popularly known as Rupee Cost Averaging, this feature, helps the investors, at the time of recession, as markets turn weak and NAVs of funds go down, every SIP fetches more units to their investors. These accumulated units will help you build a huge corpus. So basically, investors gain a profit by continuing their SIP’s during a recession. In fact, mutual fund experts say, investors should actually welcome volatility during the beginning or middle stages of their SIPs, this helps them accumulate the number of units in their investments.
2. Go with less volatile funds
People are there, who have very low risk holding capacity, and are unable to resist the ups and downs of the market, are always advised to invest in less volatile funds. In fact, these kinds of investors should consider their investment in Hybrid Funds. These funds are designed to limit the volatility in returns, in the prevailing market situation.
Hybrid funds do consist of different plans or schemes, they are popular as a perfect blend of both equities and debt funds. These kinds of funds invest in both, debt instruments and equities to achieve maximum diversification and assured returns.
3. Diversify with gold, US funds
Well, it is traditional and experimented formula to reduce the risk in a mutual fund, diversify your portfolio, but it works only when you diversify your portfolio smartly. Experts mention that, during times of uncertainty, investors should keep around 10-15% of their portfolio in gold. Moreover, instead of investing in physical gold, people should invest in paper gold, because the making charges in physical gold eat into returns and issues such as safety, liquidity, and purity.
An investor can also diversify their portfolio by investing in US stocks or funds (international funds), this can benefit in two ways:
- They provide geographical diversification by investing in another country whose market has little correlation to the domestic market
- They provide currency diversification.
4. Create an Emergency Corpus
Life is full of uncertain events that are, so-called emergencies, that can be medical or many more. These emergencies do not come with a buzzing alarm, in fact, they even don’t give you time to prepare yourself to deal with them. So, it is always better to be pre-planned for these emergencies. Building a kitty to take care of medical or financial emergencies is the first step in any financial plan. A better way to create an emergency corpus is, invest in Emergency Funds.
5. Instead of redeeming, stop your investment
Never redeem your fund at the bear phase of the market, ultimately you will end with low return or maybe a loss, better wait for the market to rise again, and then redeem your fund, till then you may stop investing in your fund if you think your fund is losing.
As of now, you are aware of the strategies that can work, to maintain your mutual fund investment in a better position even during the time of recession. So next time, if you feel like redeeming your fund, during a bear phase of the market, calm down, do remember these strategies and apply them with your investment, you will receive a good return, at the end.
Most importantly, always consult a financial planner or advisor, before taking any step towards your investment during a recession. They will guide you in the best way, with your investments.
You can also contact us at Shri Ashutosh Securities Pvt Ltd., we are here to help you in any way possible.
(Mutual Fund investments are subject to market risk Illustrations are for example only, there is no guarantee of returns. Past performance is not an indicator/guarantee to future returns).