Amid the uncertainty in the current market situation brought about by the Covid-19 pandemic, it's crucial to be cautious while choosing a mutual fund product.
Choosing the right tool can help your investments ward off a severe financial crisis like the one we currently find ourselves in. Now, mutual funds offer a variety of investment options. Each mutual fund scheme has a different role to play in the journey to achieve your financial goals. You can’t use the same mutual fund scheme for achieving all your short and long-term targets. Your risk appetite and financial goals will change at different stages of your life, so you need to select the mutual fund appropriate for your needs.
Amid the uncertainty in the current market situation brought about by the Covid-19 pandemic, it’s crucial to be cautious while choosing a mutual fund product. Here are some important tips which you’re likely to find very useful while selecting mutual fund investments in the current scenario.
Invest as per your risk appetite
Your risk appetite is tested frequently whenever there’s a financial crisis. For example, if you invest in an equity mutual fund during such a time and the market falls, your portfolio is likely to show losses. Now, if you have a low risk appetite, you may panic in such a situation.
Usually, two things may trigger panic when you have a low risk appetite. First, when you invest more than your capacity and you feel stressed whenever there is a little fall in your portfolio value. And second, when you invest in an instrument without considering its ideal holding tenure. For example, suppose you have invested for the short-term in a mutual fund scheme which requires long-term holding for delivering the desired result. With a low risk appetite, you may not be able to tolerate any short-term volatility reflected in a long-term investment instrument.
As such, it’s crucial to understand your risk appetite before investing in a mutual fund scheme in the current market. Your risk appetite may have changed due to changes in your lifestyle, income pattern, and other similar factors. Portfolio rebalancing plays a crucial role in such a situation. If your risk appetite has reduced, it’s better to increase your investments in low-risk mutual fund schemes and decrease the exposure in the high-risk ones. However, it’s also highly important that you avoid becoming completely risk-averse in the current market because you may lose the opportunity to buy mutual funds units when the NAVs are at a very low level during the current phase.
Evaluate the ideal asset holding tenure
So, you must be wondering: what’s the ideal asset holding tenure for various types of mutual funds? If you invest for a very short-term purpose, say up to nine months, you would be well-advised to focus on mutual fund schemes that are low risk and are relatively free of volatility concerns, like a liquid fund or an ultra-short-term fund. For medium-term investment horizons, i.e., one to three years, you may focus on short-term debt funds. For the long-term i.e., more than three years, you may invest in equity mutual funds.
Now, if you are looking for high returns in the long-term while keeping the risk under control, it’s always better to opt for Systematic Investment Plans over lump sum investments. However, if you want to make a lump sum investment in the current market, top-rated debt funds could also offer you decent returns at lower risk exposure.
Don’t invest the entire fund in a single scheme
In the current market, it’s also vital that you properly diversify your investments across different asset classes, and also in various companies within the same asset class. For example, if you want to invest in large-cap equity funds, divide your investments in multiple funds by different companies in a similar scheme category. Also, depending on your risk appetite, returns requirement, and age, try to keep your portfolio adequately balanced in equity and debt schemes.
Understand your liquidity requirements
Maintaining sufficient cash reserves should also be your priority, especially during such uncertain times. So, while investing in mutual funds, you should keep an adequate portion in such schemes which offer quick liquidity. This could prove to be handy if you face a sudden financial crunch. The point being, don’t invest such funds in long-term schemes that you may require in the short-term as well.
Track the fund ratings
Before investing in a mutual fund scheme, you should check how it is rated by the rating agencies like CRISIL, ICRA, etc. You must avoid low-rated mutual funds in the current market scenario. That being said, ratings should not be the sole criterion for selecting a mutual fund scheme; you should also check other vital parameters, like fund portfolios, simultaneously. For example, if it is a debt fund, check the credit rating of the assets in its portfolio and the portfolio concentration of the fund. It should be adequately diversified. Reputation, expense ratio, the track record of the fund manager, etc. are a few other points that you must keep in mind while selecting a mutual fund in the current market situation.
(The author is CEO, BankBazaar.com)