Market volatility is a term most investors are aware of in theory, but still, worry about when it actually takes place. Of late the Indian market is going through a rough phase and several reasons can be attributed to the lows.
If you are a mutual fund investor disturbed by the market downturn, this article is for you. Here is a mini-guide to help you make informed decisions about your investments. Read on:-
If the news is to be believed, there could be several factors leading to a market slowdown. These could be due to post-budget announcements, FPI outflow, bad monsoons, the poor performance of India Inc in quarter 1, increased tax rates for the rich, bad loans or a mix of all these factors. In short, you can not predict with accuracy.
Many people who are disturbed by temporary market volatility which is often seen after important government policy changes or announcements, take a hasty decision of selling their stocks or mutual funds. This ultimately leads to a cycle of more people selling stocks than buying stocks which eventually results in the further fall of the market.
If you are worried about the impact of market movement on your mutual fund investments, here are a few things to consider before making any decisions regarding your investments
The first step is to understand your true risk profile. Are you a long term investor? If yes than worrying about market volatility due to budget or FPI exit or any other reason is a futile activity, as you can never predict market movements in the short term.
In the long term, however, markets have performed well despite bad government policies and other geopolitical occurrences. If you want to invest in the short term, stay away from equity and invest in debt or liquid funds instead. If you are a medium-term investor invest in a mix of equity and debt instruments according to your risk-taking appetite.
As a retail investor, you may panic when you see your portfolio is in the red zone, not performing as per your expectations. Now if, like an ideal investor you have invested according to your true risk profile and investment objective, then it is wiser to just stick to your original investment plan and asset allocation.
A hasty step such a mutual redemption is not warranted just because your portfolio is not giving satisfactory returns for the time being. However, if you feel the fund strategy has changed and doesn’t align with your investment objective or your funds have been consistently yielding poor results, then, in that case, you should consider switching to better performing funds, irrespective of market movements.
If at all you have to make investments, start a SIP and avoid making huge lump sum investments when the market is in flux. Another good strategy is to park your lump sum amount in a liquid fund and then start a Systematic transfer plan that diverts your money into an equity fund after the market stabilizes.
If you have an ongoing SIP, do not stop it. Stopping your SIP during market lows is one of the worst investment decisions you could make. SIPs by nature is curated such that you don’t need to time the market. During market lows, it is one of the best tools to continue investing to take advantage of the fall in prices. Buying more units when the price is low ensures you stand to gain when the price recovers. Focus on the long term growth of your funds and continue your SIPs.
Keep your perspective in place. Market downturns aren’t a rare occurrence. They are also short-lived. Historically speaking, market drops are eventually followed by an upward climb. In order to make the most of the downturn, the best thing to do is to keep your logic in place and not dispose of your assets.
Market volatility is triggered by a number of factors and regardless of whether you are a seasoned investor or have just started your investing journey, everyone faces market swings sometime in their investing cycle, many even face multiple such oscillations.
This is because such volatilities are part and parcel of the investing journey. You can’t avoid it. Having said that, market swings are not always a bad thing. Investors who are able to reap long term benefits acknowledge the fact that market volatility is the feature that creates risk and hence rewards in the form of inflation-beating returns.
You can take it in your stride and make the most of the market if you stay focused on your goals and remain unfazed by the surrounding panic.
Disclaimer: The views expressed here are of the author and do not reflect those of Groww.