Smart investing: Four ways to ride out volatility in the market

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Published: March 5, 2019 2:22:28 AM

While most investment options have lock-ins and limits on withdrawals, barring ELSS, there is no such bar in mutual funds. One can invest, switch, transfer and liquidated funds at any moment.

In liquid funds, the underlying securities have a maturity period of 91 days and short-term funds have maturity between six months to four years.

With negative returns from equity mutual funds for the past one year, many retail investors who have been resilient in their investments in the past are now showing a bit of panic. Data from Association of Mutual Funds in India show net inflows into equity mutual funds are at a 24-month low, at `6,158 crore in January, a 60% drop from net inflows of `15,390 crore in the same month last year.

Avoid the herd in volatile times

When the stock market is volatile, most people sell their equity investment or stop systematic investment plans because of fear of losing money. Investors who panic when the markets are down are simply locking in their losses. Experts say that the exact time that investors choose to abandon a market, the stock market bottoms out or is near a bottom. So, reacting emotionally to sudden shifts in the market will have negative consequences.
Ideally, investors must build their portfolio with an equitable mix of equity, debt, gold and real estate which will deliver in all weathers. Various studies have shown that when everyone expects continuing fall in prices of stocks, that is usually the time when markets turn around.

Remember, volatility is a friend

Instead of tracking market movements on a daily basis, stock market investors must look at the company’s operating performance and its business developments to gauge the performance. Also, betting on a company just because its stock price has fallen would not make much sense and due diligence and conviction will be pertinent. An investor needs to realise that the market value of his investments may be down today, but since he doesn’t need the money in the short term, any notional loss will not matter much.

Brijesh Damodaran, founder and managing partner, BellWether Advisors, says that reacting to price movements during volatility harms one’s investment portfolio in the long run. “The sooner you remove emotions and incorporate process in the investment framework, the more stable will be your return in the long term,” he says.

Invest in ELSS to save tax

By investing `1.5 lakh in equity-linked savings scheme (ELSS), an individual in the highest tax bracket of 30% can save up to `45,000 in tax. However, the returns are taxable on redemption as long-term capital gains is applicable after one year at 10%. There is lock-in of three years in ELSS, which is the lowest compared to other tax-saving instruments like Public Provident Fund, National Savings Certificate and 5-year bank fixed deposits.
In fact, an individual can invest a minimum of `500 in ELSS and there is no cap on the maximum amount of investment. The investor will not have to look at the performance of individual stocks regularly and the returns are dependent on the fund manager’s ability to pick the right stocks.
As the fund managers have the mandate to invest the money for at least three years, that reduces the volatility and increases the returns. However, it is better to divide the amount into 3-5 funds rather then putting all money in one mutual fund company.

To beat volatility, go for debt funds

In volatile equity markets, it is better to increase the debt portfolio. Debt mutual funds are suited to short-term investing. One can invest in liquid mutual funds or short term debt funds. In both these fixed-income funds, asset management companies invest in money market instruments, certificates of deposits, treasury bills, commercial papers, fixed deposits and corporate debt. In liquid funds, the underlying securities have a maturity period of 91 days and short-term funds have maturity between six months to four years.

If you do not want to invest a lump sum in an equity fund, invest in a liquid fund through systematic transfer plan. You can park the money in the liquid fund and then transfer small amounts from it every month into an equity fund. In fact, this would not only keep the individual’s corpus safe but will also earn returns. While most investment options have lock-ins and limits on withdrawals, barring ELSS, there is no such bar in mutual funds. One can invest, switch, transfer and liquidated funds at any moment. So, diversification of portfolio can help an investor to tide over volatile times.

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