How to Strategically Approach Equity Mutual Funds in Volatile Markets

February 28, 2023 Mutual Fund

Market volatility is a measure of risk, so the risk borne by market-linked investments in your portfolio increases as volatility increases. Since volatility cannot be avoided; it’s impact on your portfolio can only be controlled, your sound investment approach will be useful in this situation.

Despite the fact that there are various market phases, such as the bull run and the bearish period, having a sound investing strategy in place will help you weather any unforeseen market changes. Pessimist investors affected by volatility in the market frequently claim that the bearish phase lasts longer than the bull run, but they forget how sporadic market jumps followed by a rally in Indian stock indices not only help investors recover from temporary losses but also produce returns that are significantly higher than the inflation rate.

Having said that, investors in mutual funds frequently have many concerns due to the constant mention of a global recession, an economic slump, market volatility, and uncertainties. Choosing the optimal strategic course of action in this circumstance is challenging. You see, losing sleep over volatile markets is not right. Investors should know their priorities and long-term expectations from the market and take confidence in their investing strategies instead of worrying every now and then.

The major equity indices for the year 2022 showed a dramatic consolidation from their all-time highs at the beginning of the year. Foreign investors shied away from investing in Indian equities markets as a result of the economic uncertainty and inflationary pressures. However, the situation changed in the second half of 2022 when the Indian economy outperformed its global peers in terms of resilience despite experiencing high inflation. As a result, the equity market witnessed a sharp rise and once again tested the previous highs.

According to market experts, 2023 will likely be a tumultuous year for both the domestic and international equities markets. The markets will still be driven by the inflation outlook and its effect on monetary policy. There is a strong likelihood that by the second half of the year, we will have passed the inflation peak, which should give risky assets like equities some relief. Investors should temper their return expectations and maintain a neutral stance on equities since the valuations are unfavourable.

Graph 1: NIFTY 100 movement Year-to-Date (YTD)

Data as on February 27, 2023
(Source: ACE MF) 

Graph 2: S&P BSE Sensex movement Year-to-Date (YTD)

Data as on February 27, 2023
(Source: ACE MF) 

You see, if you have built the groundwork and pursued a strategic approach to your equity mutual fund investments, navigating through such economic upheaval is easier. Knowledge is power when it comes to investment techniques to deal with unpredictable markets. Investors need to stay informed and have a plan in place in this constantly shifting market climate so that they can feel in control of their portfolios no matter what happens.

In this article, let us focus on a few important strategies you need to implement to position yourself to sustain the market volatilities ahead in 2023:

1. Don’t panic and stay put with your long-term investments

During a market turmoil, investors are more likely to take rash investment decisions if they are not pursuing a clearly defined framework. Do not panic, and avoid market noise; otherwise, one may end up liquidating investments, jeopardising long-term goals. It’s important to stay put with your equity mutual fund investments and let your money continue to grow over time.

The fundamental concept is to stick with your long-term investment strategy because it is focused on your long-term goals and includes built-in safeguards against market volatility. For example, the Systematic Investment Plan (SIP) is designed to make the best of market volatility. Since your SIPs ensure that the power of compounding works in your favour. If you look at historical data of SIPs, they have substantially outperformed the index since they have made the best of market volatility.

2. Strike the risk-reward balance in your portfolio

The strategic approach you need to apply is to be overweight on quality and underweight on risk in your portfolio, especially your equity mutual fund portfolio. When the markets are on a bull run, you do tend to load up on mid-caps, small caps, sector funds, thematic funds etc. Never take on too much concentration risk when the markets are volatile. Restrict your portfolio allocation up to 5% to 10% in sectoral/thematic funds.

Additionally, concentrate on stocks that have historically demonstrated high standards of corporate governance and transparency. In an unstable market, they are your greatest bets. You can think about concentrating on equities with high-growth stocks, high-margin businesses and market leaders within the industry. They are most likely to perform decently in the midst of volatile markets.

3. Diversify your equity mutual funds

Diversifying your portfolio is one of the most important steps you can take to protect and grow your investments during volatile markets. By spreading your money across equity-oriented mutual funds can reduce the risk while still having the potential for returns over time.

Your mutual fund portfolio should have a tactical allocation across asset classes and market capitalisation. As a result, it provides your portfolio with the required stability and the potential to generate better risk-adjusted returns. When it comes to equity-oriented funds, large-cap funds are more stable and less risky than their counterparts, mid-cap and small-cap funds. When your portfolio is sufficiently diversified, it is protected against the underperformance of a few investments while benefiting from those that are performing well at the moment.

Additionally, investing in low-cost equity index funds is a great way to diversify your portfolio and maximise returns while minimising risk. Index funds tend to have more consistent performance than actively managed mutual funds, which may be subject to greater volatility due to stock-picking decisions made by managers. Also, since most indexes are weighted based on market capitalisation rather than price movements alone, they tend to be less volatile and better suited for conservative investors who prefer slow but consistent growth over high-risk/high-reward strategies.

4. Periodic portfolio review

Considering equity mutual funds are highly risky and volatile in nature, reviewing your portfolio on a periodic basis (semi-annually or annually) is an important task. It involves periodically adjusting the proportion of equities in your portfolio to maintain a desired level of risk and return. With periodic reviews, you can ensure your equity investments remain aligned with your goals. You should consider rebalancing your portfolio if required due to any changes in your financial circumstances or if you identify any consistent underperformance of holdings in your portfolio.

Given that, it will be prudent to review your investment portfolio at the beginning of 2023 to hedge against any possible downturn. I recommend ‘PersonalFN’s Mutual Fund Portfolio Review’ service, which is a personalised portfolio review service designed to boost the returns of mutual fund investors by reviewing and streamlining their existing mutual fund portfolio.

5. Make informed investment decisions

In order to strategically approach your equity mutual funds during volatile markets, staying informed about market trends is crucial. Keeping up with market-related news is essential for successful investing. It’s important to be aware of changes in the market so that you can adjust your portfolio accordingly.

Try to keep up with current events, domestically and internationally, as they could substantially impact your investments. For example, a change in government policy or regulations could affect certain industries or companies, consequently affecting their stock prices. It’s also important to stay informed about economic indicators like inflation, unemployment, and GDP growth rates. Being aware of any shifts in these metrics will give you insight into how different sectors might perform going forward so that you can adjust your portfolio accordingly if needed.

Therefore, to survive the tide of market volatility, you may consider sticking to the above-mentioned strategic approaches towards your equity mutual funds. However, you must ensure to choose worthy mutual fund schemes that align with your financial goals and help you build a well-diversified portfolio that sustains through various market cycles.

This article first appeared on PersonalFN here