Managing Funds When the Markets are Volatile
Written on Wednesday, October 14, 2015
By Sanjeev Puri
India’s emerging economy definitely looks promising in the long run. The Indian growth story looks better placed than its emerging counterparts like Brazil, Russia or China. As a mutual funds investor, here are few things that one can do to manage funds better when the markets are volatile.
Do not listen to predictions
It’s absolutely impossible for anyone to predict the movement of markets. Stay away from predictors at all cost. Factors affecting market movements have increasingly become more complex, inter-related and dependent on global events as well. Further, there are technical factors too at play. When technical support levels are broken by market, the next level gets projected as the support. But then, markets move on their own and all these supports can be broken. Thinking to invest, based on predictions, could be financially damaging. Be invested in the markets, one never knows when the markets reverse and bounces back.
Keep Systematic Investment Plan (SIP) running
All those MF investors, investing through SIP may continue with their SIP’s. And there are convincing reasons to do that. SIP’s are not making all your funds get exposed to market volatility all at once. When index is down, they get more units while when the index rises, the units bought is less. This approach helps in accumulating units, the average cost of which is lesser than otherwise. The risk of volatility gets minimized through SIP approach.
Use Systematic Transfer Plan (STP) to invest lump sum
With regards to fresh money, the approach gets tricky. If you are looking to invest a lump sum in current markets, tread cautiously. Depending on your goals and risk appetite, invest the amount partly in debt and partly in equity especially through STP. Instead of putting entire money in equity funds, in STP, funds are initially put in liquid or a debt fund and a mandate is given to keep transferring a fixed amount on regular basis (say, monthly) into the equity fund of same fund house. Through an STP, the investor can transfer parts of a lump sum from one MF scheme to another, within the same fund house, at regular intervals.
Do asset allocation exercise
When markets fall, it’s time to review your asset allocation as well. An important part of the review is to check the asset allocation of the portfolio. The financial planner may have suggested a 70 per cent allocation to equities, 20 per cent to debt and 10 per cent to gold initially. See, how has this allocation changed. After the review, the financial planner may recommend selling a part of the client’s debt and buy more of the equity. This process is called re-balancing of the portfolio.
Review your MF portfolio
This could be the right time to review your portfolio. Look at the returns of funds of your portfolio against benchmarks and market returns. It may be the right time to remove the under-performers. There could be funds which have fallen far in excess of markets. Those funds which have fallen less could form a part of your portfolio too. Get your financial plan reviewed to ensure that you stay on course.
Take controlled risk
With interest rates coming down, the general impact on the economy can be huge. Policy rates have direct impact on the asset prices. Both equities as well as debt assets stand to gain. Investors, as of today, gain from the potential of both these assets in generating high real returns. Instead of investing in both, balanced mutual funds or the hybrid funds, one-single scheme may provide the opportunity to reap benefits from both these asset classes.
Park in debt
Interest rates in the economy are on its way down. When rates fall, prices of debt instruments move up. Investing in debt funds could help in these times and one may expect a decent return over the next 3 years period. Invest in debt fund with a 3-year horizon, as they qualify for long-term capital gain tax of 20 percent after indexation, after 36 months of holding the units.
In these times, when the stock market volatility is on high, many investors get a bit conservative. The fear and the probability of losing capital in the shot-term is high. Volatile markets like the one we are currently witnessing tend to dissuade some section of investors, especially the conservative ones. For investors who want to expose funds into equities yet keep the capital safe may consider ‘capital protection oriented’ (CPoF) mutual funds scheme.
Markets are always unpredictable and therefore, the potential to generate high real return exists in them. Bank deposit returns are predictable and assured and hence, are low. For long-term wealth creation, returns have to beat inflation by at least 3-5 percent. Volatility may be high in short-term, but over long-term equities have delivered higher real returns. If your goals are long-term, stay invested for long. Markets may turn for the upside anytime. Rather than trying to time the market, ensure you spend more time in the market.