Mutual Funds: Stay invested in equity if you have a long investment horizon

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Published: April 7, 2020 2:35:17 AM

Regulations define specific structures / entities within mutual fund companies to safeguard investor monies from issues such as fraud, etc.

SIPs are a mode of investment facilitating regular investments, enabling an investor to average the cost of his investments. SIPs are a mode of investment facilitating regular investments, enabling an investor to average the cost of his investments.

The corpus of my Rs 10,000-a-month-SIP investments has dropped below the amount of investments actually made. Should I stop the SIP for some time and how can I recover whatever I have invested in the last three years?
—Atul Mahajan
Equity investments have delivered higher returns than fixed income over long periods (10+ years), albeit with higher volatility. However, recently equity markets have corrected sharply on concerns over the coronavirus outbreak. The correction (drawdowns of about 35%) has led to the trailing 3-year SIP annualised returns in equities turning negative. Also, the five-year SIP performance has been only marginally above zero. Equities tend to bounce back after sharp corrections and have delivered positive inflation-adjusted returns in the long run, despite witnessing similar corrections in the past too. SIPs are a mode of investment facilitating regular investments, enabling an investor to average the cost of his investments. This benefits investors in falling markets since they would be buying units at cheaper prices. Hence, you may remain invested if you have a long time horizon.

In extreme volatility, how safe is my mutual fund money?
—Suresh Rajgopal
Regulations define specific structures / entities within mutual fund companies to safeguard investor monies from issues such as fraud, etc. Further, regular audits are mandated for fund companies to ensure that they are functioning in line with regulations. The regulator has also defined fund categories and disclosure requirements and prescribed the broad framework that needs to be followed by fund companies. Funds operate within these frameworks and underlying investments would be subject to market volatility based on the respective categories such as equity – large, mid, small cap, etc., fixed income – liquid, short term, credit risk, medium term, etc. and allocation categories – aggressive, moderate, low, etc. among others.

You may remain invested in your mutual funds, if you have a long investment horizon. Ideally, based on your risk profile, an asset- allocation based approach (mix of equity and debt) should be followed. With this approach, allocation to equities can be higher for longer investment horizon.

The writer is director, Investment Advisory, Morningstar Investment Adviser (India). Send your queries to fepersonalfinance@expressindia.com

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