Dont Press The Panic Button Yet

The growth of mutual funds in India has been quite impressive over the last few years. It is evident that mutual funds have begun to play an increasingly important role in the portfolios of Indian investors. What is even more heartening is the manner in which investors have been investing in mutual fund products, especially equity and hybrid funds. The ever-increasing number of SIPs highlights investors’ preference for a disciplined investment approach. Besides, a goal-based investment process is gaining momentum and that augurs well for investors as mutual funds remain the best investment option to carry out asset allocation.




Hemant Rustagi 
Chief Executive Officer, Wiseinvest Advisors 

However, the last one year has been a tough one for investors as returns from most equity and equity-oriented hybrid funds have either been negative or dismal. While having an investment plan in place helps in ensuring that only medium and long-term money is invested in equity-oriented funds, it is crucial to continue the investment process through ups and down in the market to benefit from their true potential.

It is a known fact that one has to contend with a number of challenges during one’s investment process from the start to the completion of the time horizon. The major challenge is tackling the volatility in the market. A current market like situation, where investors are experiencing negative returns even for their investments through SIP, can test their patience and perseverance. If you are one of those investors who are worried about the future prospects of investments through SIP, it is important for you not to allow panic to influence your investment decisions. In fact, you must remember that investments made during market falls will help you bring your average cost down.

If you take a close look at investments made through SIP over the last 18-24 months, you will realize how your average cost has been coming down systematically. The negative returns from your investments are mainly on account of investments made at higher NAVs in the initial 6-8 months, especially in multi-cap, mid-cap and small-cap funds.

Therefore, the more money you invest during market downturns, the easier it becomes for your portfolio to recover when the market starts performing well again. Therefore, if you are sure about your asset allocation and selection of funds in your portfolio, there is no reason for you to panic just because of negative/lower returns during a certain phase in the market. Remember, abrupt and irrational selling decisions can make a severe dent in the long-term prospects of your investments. In fact, it is crucial to know how to manage your selling decisions.

While you may feel compelled to make some ad hoc decisions in certain situations, it never pays to press the panic button as that can result in some irrational decisions. Hence, having a strategy in place for making a decision to exit from a fund and sticking to it can go a long way in keeping your portfolio on track to achieve your investment goals. Broadly speaking, there are three occasions that should necessitate a selling decision. Firstly, sell a fund if your investment plan requires you to do so.

For example, when you invest in a fund with a clearly defined time horizon, you would need to sell it after the completion of the period. However, if it happens to be an equity fund, the selling should be done in a phased manner and the process should begin 6-12 months prior to the completion of the time horizon to protect the accumulated gains.

Secondly, consider exiting from a fund if its performance has not been satisfactory for a period of one year or more. Thirdly, sell a fund when it no longer meets your needs on account of change in your personal situation. Remember, the key to long-term success is to ensure that your portfolio consists of only those funds that suit your needs at all times.