Infocus

Investing money to achieve varied investment goals is a process that requires investors to follow a disciplined approach through their defined time horizon. However, considering that different asset classes behave differently over different time periods, asset allocation plays a significant role in deciding the kind of returns one can expect and the kind of risk one could get exposed to. Of course, when it comes to investing in the stock market either through mutual funds or directly, investors have to contend with turbulent periods that may test their patience and perseverance. 

Hemant Rustagi 

Chief Executive Officer, Wiseinvest Advisors 

Over the last six months, the market has turned volatile and its impact is clearly visible in the valuation of investors’ portfolios. A number of domestic and global factors such as the reintroduction of the long-term capital gains tax on equities in the Union budget, tension between North Korea and the US, escalating trade war between the US and China, rising oil prices, tightening of interest rates in the US as well as rate hike by the RBI have contributed to this volatility during this period. 

The recent recovery in the market saw BSE Sensex at a new high of 36,533.63 and Nifty 50 reclaiming 11,000-mark. However, the mid-cap and small cap stocks continue to remain under pressure. Considering that many investors increased their allocation to funds investing in mid-cap and small-cap stocks, they are facing anxiety and the dilemma of what to do now. 

If you are an existing investor in mutual funds, it is important that you don’t act in a haste as it can have serious implications on your financial future. There are certain do’s and don’ts for investors when faced with a current market-like situation. Here are some of these and a few pointers on how you can use volatility to your advantage. 

Continue with your SIP contributions 

If you have been investing in equity and equity-oriented hybrid funds through SIP with a clearly defined long-term horizon to achieve investment goals like children’s education and retirement planning, the current volatility shouldn’t really be a cause for much worry as you have time on your hand. Remember, when you invest at lower levels of the market, you get more units and that brings your average cost down. 

Don’t make abrupt changes to your asset allocation 

A volatile market can unnerve even the most seasoned investors. No wonder, many retail investors feel compelled to look for safety by moving money into debt instruments, when faced with uncertain markets. For example, currently the 3-year FMPs have emerged as an attractive option for investors as the money will get locked-in at attractive yields. However, diverting long-term money earmarked for important goals like children’s education and retirement planning into such options can backfire as one would lose out on opportunities to invest at lower levels in the stock market. The key to handle turbulent times in the market is to keep focus on your investment goals and continue investments uninterruptedly. 

Good time to realign the portfolio 

If you made your portfolio risky over the last couple of years by aggressively investing in mid-cap and small-cap as well as thematic and sector funds, it would be a good idea to realign the portfolio by paring exposure to such funds and reallocating that money to large-cap oriented multi-cap funds. Aa a thumb rule, around 50-60 percent of your equity fund investments should be in large-cap and the remaining in mid-cap and small-cap segments of the market. 

Don’t try to time the market 

While investing long-term moneyat lower levelsas a part of your investment plan can make a big difference to your portfolio return, the temptation to time the market solely for the purpose of taking advantage of a fall in the market and investing without a clear time horizon can expose you to unwarranted risk.