The recent fall in the stock market has impacted investor portfolios with equity mutual fund investments. In the last one month, key benchmark indices lost nearly six per cent. Mid-cap stocks witnessed an erosion of about 14 per cent while small-cap indices have been battered the most as a fifth of investment value got wiped out in a matter of a month. Such a fall can create panic among mutual fund investors who have been regularly investing in various equity funds. Even monthly SIPs over the last 12 months or so are showing negative returns. Amid such mayhem, there are obvious concerns in every mutual fund investors’ mind: Should they stop, pause, or exit their investments at this stage? As investors, we are wired towards risk avoidance. A situation such as this calls for calm heads. Here’s what you should do.
DON’T PANIC
First and foremost, do not panic as it could lead to rash, uninformed investment decisions. Stay calm and look at your investment portfolio with a cool head before arriving at a reasonable conclusion. Ups and downs are a daily fact on the equity markets. Some rises and falls are steeper than your expectations. This is natural for any market — be it stocks or commodities or bonds. During such times, it is wise to consult your advisor or somebody who has been a seasoned investment expert.
REVISIT YOUR RISK APPETITE
It is advisable to keep revisiting your risk-taking capabilities on a regular basis during the tenure of your investments. During market corrections, you must re-assess your risk-appetite — i.e., your ability to afford loss in your investment. If you find that your risk taking capacity stands stronger than before, then don’t touch your current investments. Let them continue. However, if during the process of re-assessment, you find you can’t afford further losses as you may require funds to address some of your immediate, unavoidable needs, it is advisable to withdraw the required sum through a partial redemption from your equity mutual funds. Remember you should redeem only the amount you really need. You may not need to stop the whole investment or make a full redemption immediately.
REMEMBER YOUR FINANCIAL GOALS
All investment in mutual funds must be goal-based and not for short-term benefits. Equity mutual funds are investment vehicles meant to create serious wealth in the long-run and should not be seen as merely money-minting investment avenues in short duration of time. At times of corrections or sharp crashes in markets which negatively impact your value of investment you need to ask yourself a simple question - have you achieved, or are you close to achieving, your goal? The goal could be your child’s higher education, marriage, buying house or car. If your answer is ‘no’, and you know there is still time left for attaining the goal, it’s wise to not be perturbed by the volatility. Stay focused on your goal and continue with your usual regular investment. Treat the corrections as if nothing has happened. But if you answered ‘yes’ as you may need the money for your goal very soon, you should consider stopping your investment and redeem the required amount. If need be, you should not mind withdrawing the whole investment if it is equivalent to or close to the required sum to fulfil your goal.
INCREASE YOUR INVESTMENT
If your risk-appetite is strong and your goal to be achieved is still far away, you sho-uld use the market crashes to put in additional sums as fresh investments. Avoid putting in large lump sum amount in a falling market in one go unless you feel the markets have bottomed out. Use every large dip in the market to purchase additional units. This way not only will you accumulate more number mutual fund units at lower prices thereby lowering your average cost of unit acquisition, but you will also reach your goals faster.
SHUFFLE YOUR PORTFOLIO, IF REQUIRED
Since certain pockets of the markets have corrected at an unusual pace, it may be the time to re-assess your entire portfolio and make the necessary changes. For instance, mid and small cap indices have crashed 14-20 per cent in the past one month. If a portfolio assessment finds that it is tilted towards mid and small cap funds, it's time to act fast and re-shuffle your schemes. Either fully or partially move out from such schemes to large cap equity mutual funds or diversify into debt or balanced schemes. While doing this, look at your current risk appetite and the number of years left to attain your goal. Depending on the status you should take an informed decision even when it comes to shuffling of your portfolio.
The writer is the CEO of BankBazaar.com
