Mutual Funds: Tips to make the most of bearish markets

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Published: April 8, 2020 12:31:53 AM

From continuing with your SIPs to safeguarding your liquidity and investing in large-cap, multi-cap and index funds, make your market moves in a judicious way to avoid any investment mistakes.

Invest in equity funds only if you have an investment horizon of at least three years.

Across-the-board corrections in Indian equity markets have opened up fresh buying opportunities at attractive valuations. The twin emotions of greed and fear may lead many retail investors to commit serious investment mistakes. The following tips would help retail mutual fund investors to make the most from the prevalent bearish markets.

Invest only with long-term horizon

The steep correction in equity markets may prompt many investors to invest in equity funds for generating quick returns in the short term. However, bearish phases can continue for a considerable period keeping your lumpsum investments in red for a long time. Hence, invest in equity funds only if you have an investment horizon of at least three years. As the bull and bear phases are highly correlated with the economic cycle, an equity investor should ideally try to stay invested in equity funds for at least seven years to make the most from the entire economic cycle.

Don’t redeem investments in panic

Anticipating a deeper correction, many investors think of redeeming their existing mutual fund investments to repurchase them at lower levels. However, predicting the market bottom is very difficult, even by financial experts. A sharp rebound in the market post-redemption would lead you to unnecessarily book notional losses and severely impact your financial goals.

Continue with your SIPs

As a knee-jerk reaction to steep market corrections, many investors tend to stop their SIPs or even start redeeming existing investments. Instead of getting overwhelmed by the emotion of fear, investors should invest during the market downtrend just like they continued investments during the market uptrend. Continuing SIPs during the bearish phase will allow them to buy more units at lower NAVs and thereby, reduce their average investment cost. This will help in creating bigger corpus as and when markets rebound and thereby, help reach one’s financial goals sooner.

Top-up equity investments

Asset allocation is the process of distributing investments across various asset classes on the basis of your risk-appetite and time horizon left for your financial goals. As equity markets witness steep corrections, the proportion of equity investments in your portfolio will come down with respect to fixed income instruments and other asset classes. Hence, rebalance your portfolio by redeeming your fixed income instruments to top up your existing equity investments. Portfolio rebalancing will also bring your portfolio to the original asset mix, buy quality equities at attractive valuations and thereby, average your investment cost.

Don’t compromise your liquidity

The scope of earning quick returns through lumpsum investments during market corrections may tempt many to invest their entire surpluses in equity funds. However, any unforeseen financial exigency during the period would either force you to redeem your equity fund investments at a loss or take loans at high interest rate. Hence, invest your surpluses in equity funds only after factoring your contributions to emergency fund and short-term financial goals. Moreover, it is very difficult to predict the bottom as well as the duration of any bearish phase. Hence, investing lumpsum in a staggered manner will leave you with sufficient cash to exploit future market volatility.
Invest in large cap, multicap and index funds.

Invest in multi-cap funds which invest across all market capitalisations and sectors without any SEBI-imposed caps. The fund managers of multi-cap funds are free to change their exposure to different market capitalisations and segments according to changing market conditions. Under the current market conditions, multi-cap funds are best placed to exploit market opportunities and manage the risk arising out of changing valuations and various fundamental and technical factors. Those with lower risk appetite can opt for large-cap funds.

Investors can also invest a part of their fresh investments in index funds. Doing so will allow them to benefit from steep market rebounds in case the actively managed equity funds miss the bus due to higher cash calls.

The writer is director & group head, Investments,

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