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No need to panic, adopt a long term approach

| 7/4/2011 2:53 PM Monday

While it is a well-known fact that equity markets have a tendency to be volatile from time to time, different investors react differently when faced with it. While the seasoned investors may take volatility in their stride, for new investors it can be quite a nightmarish experience. Here are some of the fears that plague the minds of investors in difficult times as also pointers to how to handle such situations.

Among the first things that come to the minds of many investors, when faced with a market downturn, is whether they have been getting the right advice or not. The fact is that you should not be assessing the quality of the portfolio only during difficult times. It is very important to periodically evaluate what type of advice and service you are getting and whether it is helping you achieve your financial goals. Here’s what you should look for:

  • It is important that your advisor determines your risk level before suggesting the schemes. Remember, it is the level of risk that provides the guidance about the kind of return you can expect as well as the level of volatility, while achieving it.
  • Ensure that your advisor provides you with a comprehensive, well thought out plan for your money. Also ensure that the plan has the required flexibility to take care of the changes that might take place in your needs.
  • Ensure that your portfolio is a well-diversified one. Besides, while reviewing your investments, if you notice that your investments are consistently losing money, make sure your advisor has the right answer for it.
  • Make sure you know the reasons for investing or redeeming any MF investment. Also, you should know how a recommended scheme fits into your personal financial plan.

Further, considering that mid-cap funds are generally among those that are hit the hardest during a market downturn, the steep fall in their values make investors panicky. The fact, however, is that, mid-cap companies have a lot of room for growth as the economy marches ahead. From a fund manager’s perspective, there is a large and diverse group of companies across industries to choose from among the mid-cap universe of stocks to create a well-diversified portfolio.

Mid-cap funds are a good means to enhance your returns over the long term and add a flavour of growth. Investors with some appetite for risk must consider having mid-cap funds in their mutual fund portfolio. However, it is important to remember that these should not have a disproportionately high weightage in your portfolio. The ‘bread and butter’ funds, so to speak, should be the diversified equity funds, with mid-cap funds at the next rung.

An increased amount of volatility in the stock market often tempts investors to make wholesale changes in the portfolio. The fact, however, is that portfolio review is an ongoing exercise and not an activity to be undertaken in a haphazard manner. While reviewing the portfolio, you must consider the following:
  • How is your portfolio performing from the view point of your personal goals? Are you comfortable with the price fluctuations that may have occurred keeping in view your short-term, medium-term and long-term goals?
  • How are your investments performing compared with others in the same category? For example, a growth of 10 per cent in your fund may look great, but not if the average returns given by other funds in the same category is 15 per cent. However, too much emphasis shouldn’t be put on the short-term performance.
While reviewing the portfolio is important to ensure that your investments remain on track and it is equally important to make the right selections. Although it can be tempting to go for the top performing funds at the time of making investment, the key is to remember that the desire to take risk should not exceed your capacity to take risk. Remember, a long-term approach helps in reaping the benefits from the expertise of the professional fund managers as your investments are likely to appreciate steadily over time, overcoming most of the temporary setbacks.

 

Find More Articles on: Personal Finance, DSIJ Magazine, In Focus, Mutual Funds

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