Mutual Fund Investment Strategy You Can Follow to Counter Equity Market Volatility

January 25, 2022 Mutual Fund

After a winning run in the last one month, the Indian equity market has turned highly volatile due to weak domestic and global cues. The S&P BSE Sensex is down by around 3,800 points (or about 6%) in the last 5 trading sessions. Yesterday, January 24, 2022, the Sensex logged the steepest fall in over a month, shedding over 1,500 points. The equity market is expected to remain volatile in the coming days which could impact your equity mutual funds returns in the near term.

The following factors will likely keep the domestic equity market volatile in the coming days:

• The equity market witnessed heavy selling amid expectations that the US Federal Reserve would hike policy rates sooner than expected. The uncertainty about the quantum of rate hike has also made investors jittery.

• Geopolitical tensions between Russia and Ukraine as well as in the Middle East has sparked rise in global oil prices. Crude oil prices have inched towards $90 per barrel, igniting concerns of higher inflation in India and across the globe.

• Rising COVID-19 cases, triggered by the Omicron variant, has once again affected global supply chains as many nations have imposed travel restrictions. This could cause an escalation in the cost of sourcing components and transportation for various companies, thereby impacting their earnings growth.

• Investors are envisaging the outcome of the upcoming Union Budget, which will be presented on February 01, 2022, and its potential impact on the equity and debt market.

• The outcome of corporate earnings this week will also determine the course of the equity market. Since the beginning of October 2021, FPIs have net sold to the tune of Rs 47,000 crore amid concerns about high valuations. It will take sustainable earnings growth and economic revival to regain their confidence in the Indian equity market.

Graph: Volatility grips the Indian equity market

Data as on January 24, 2021
(Source: ACE MF)  

Given that the equity market volatility will persist, here are the investment strategies to reduce its impact on your equity mutual fund portfolio:

1) Diversify as per your asset allocation plan

Often investors chase top-performing schemes or mutual fund category based on its recent performance. However, investments should be diversified across equity, debt, and gold asset classes based on your risk profile, investment horizon, and investment objective. So, if a particular asset class underperforms, the impact will be mitigated by a likely rise in other asset classes. This will reduce the concentration risk emanating from investing in just one asset class. Also, make it a point to diversify within sub-categories of asset classes. For instance, your equity portfolio should consist of Large-cap funds, Flexi-cap funds, Mid-cap funds, Value style funds, etc. to minimise the impact of market volatility and maximise your returns.

2) Continue your investment

If you have already invested in a well-diversified portfolio of equity mutual funds do not commit the mistake of stopping, discontinuing, or worse redeeming the investments because the markets have turned volatile. Equity mutual funds are meant for the long term. If you give undue attention to short-term market movements, you may deviate from the envisioned financial goals. Remember, equity mutual fund could be affected during market turbulence, but it can reward you with handsome gains over the long term. That said, if your goal is nearing, it would be advisable to gradually trim your equity allocation from high-risk avenues such as Small-cap Funds and shift to less risky equity categories like Large-cap Funds and Flexi-cap Funds, and eventually move to less volatile avenues like debt mutual funds.

[Read: Best Mutual Funds to Invest in for Long term Investors]

3) Take the SIP route

Considering the higher equity market valuations, investing a lump sum can be a risky proposition. Therefore, prefer investing in a staggered manner via SIP, which will help your sail through the uncertain or volatile market. SIPs work on the simple principle of investing regularly in a disciplined manner that enables you to build wealth over a long period of time through the power of compounding. Investing via SIP also helps you mitigate the impact of market volatility; you buy less units via SIP when the market is on an upward trend and buy more units when there is a market downturn which averages out the cost of investment. As a result, SIP makes timing the market irrelevant, so you do not have to worry about market conditions.

4) Review and Rebalance

As mentioned earlier, if you have a long term investment horizon and a high risk profile, then it makes sense to continue with your equity mutual fund investment. But ensure that you review the performance of your mutual fund portfolio periodically (at least once a year) to see if it is well-placed to achieve your goals. Your mutual fund scheme should be well-placed to protect the downside risk during volatile or bearish market phases and also participate reasonably during market rallies compared to the category peers and the benchmark. In addition, check if rebalancing the portfolio from equity to debt or vice versa is necessary to align with your personal asset allocation plan.

To conclude

Equity market movement is never linear; you may earn supernormal returns in one year and low or even negative returns in another. Since the equity market generated stellar returns in the last two years, the returns may moderate in the future. Therefore, ensure that you set realistic return expectations. Diversifying your portfolio as per your asset allocation plan, opting for the SIP route, and investing with a long-term view can help you mitigate the impact of market volatility.

It is important to note that volatility is an integral part of equity investing; no one can accurately predict the direction the market may be heading next. So instead of reacting to market movement, one must focus on their financial goals by building a suitable mutual fund portfolio that can stay strong on both upside and downside market conditions. If the market volatility still makes you jittery, consider reassessing your risk-taking ability.

This article first appeared on PersonalFN here