How to invest in Mutual Funds During Volatile Markets

AMFI’s “Mutual Fund Sahi Hai” campaign may have drawn thousands of new investors into the fold last year, but volatile equity and debt markets have frustrated them so far. Small and Mid-cap funds have taken a particularly intense drubbing, but large caps haven’t been spared either. However, as an investor, you needn’t worry – Mutual Fund returns are seldom linear in nature, and you’ve got to be prepared for such times. This simple three-point action plan can prove useful in helping you tackle volatile markets.

Understand How They Work

Nearly Rs. 8,000 Crores of retail household savings now flow into Mutual Funds every year through the SIP (Systematic Investment Plan) route, but the overall levels of awareness about the nature of equity returns are still alarmingly low! Most new equity investors still harbour misplaced expectations about the way equity returns work, not realising that their portfolio values even stay in the negative zone for extended time frames, only to deliver handsome returns in the long run. If you feel unsettled at the thought of such non-linear growth, your risk tolerance levels may not be aligned to equity investing at all; and you should either stay away from equity-oriented funds (a poor choice), or just accept how they work and be mentally prepared!

Take Profits Occasionally

Many new age robo advisory platforms have chanted “SIP it, shut it, forget it” for years now, but this may very well not be sound advice at all. This grossly oversimplified formula fails on two accounts. One, it prevents investors from capitalising on profit booking opportunities during times when markets are peaking out and almost crying out “correction ahead!” Two, it disregards the all-important (and very real!) ‘behaviour gap’ associated with equity investing – after all, if an investor panics and stops & redeems his SIP’s when his money slips into the red, what good was that investment in the first place? Instead of just conveniently ‘flowing with it’, work closely with a professional Financial Advisor who can assist you with a disciplined rebalancing of your portfolio on a periodic basis. Once a year, or whenever your portfolio hits an predefined absolute return figure (say 15%) should work just fine.

Stay the Course

Remember the painful bear market of 2008, when stock prices of even good companies more than halved from their peaks? Here’s a fun fact: the investor who ‘accidentally’ forgot to stop his SIP’s between 2008 and 2011, would have been the most richly rewarded! The key lesson here when it comes to Mutual Fund SIP’s (Systematic Investment Plans) is this: when things head south, put on your seatbelt and hang in there – just let your SIP debits take place, even if it’s with your teeth gritted and your eyes closed! In fact, it is those very SIP tranches that create the maximum long-term wealth in the long run – hence, stopping your SIP’s just because “markets are bearish right now”, is the worst move of all. Remember, dispassion is your best friend during bearish phases.