What should MF investors do during market correction?
There are various things that worry investors when it comes to investing in mutual funds. The indices are presently trading at all-time highs and facing a short-term correction. As a result, investors are wondering if they should exit their investments and invest back when the markets further drop. Let’s understand what you should do as a mutual fund investor during the market correction.
Avoid NFOs
Most of the time, some of the mutual fund distributors try to sell you the new fund offer (NFO) for a simple reason – higher commissions. However, when the market is consolidating or is entering a major correction, do not opt for NFOs. This is because its performance might surprise you (in a negative sense) in the short-term and affect your investment decisions further due to fear of loss. Therefore, if you are new to mutual funds, then strictly avoid NFOs. In fact, invest in those funds that have a good performance history and have historically performed better than their category average in terms of risk & return parameters.
Fund picking
If as an opportunist, you are looking for investing in a mutual fund during the market correction, then don’t just look at its historical trailing performance but also, at its performance during the bear phase. This is because lesser the fund falls, the less time it would take to recover and start giving you returns. In fact, you can also select funds based on their performance while transitioning from bull phase to bear phase to again bull phase.
Consistency matters
Rather than basing your investment decision on point-to-point trailing returns, it makes more sense to look at consistency in performance delivery. Basing your decision on point-to-point returns may give you a false picture as they may be influenced by how the fund has performed at that point in time. Therefore, it is a good idea to either look at returns over discrete periods or check their rolling returns. Further, performance should be viewed over a minimum of two complete market cycles i.e. how the fund has performed in two bear phases and also, in two bull phases.