What should mutual fund investors do when the stock markets are highly volatile?

Here are a few key takeaways to handle your mutual fund strategy in the midst of volatile markets.

Oct 16, 2019 03:10 IST India Infoline News Service

If you had lost track of the stock markets in late June 2019 and had returned to take a look at the Sensex levels, you would be justified in concluding that nothing much has changed. But between these two periods, a lot has changed and a lot of volatility has flowed through. For example, markets crashed sharply post the Union Budget on July 05, 2019 and continued to be volatile for a period of two months. However, sentiments changed in September when the Finance Minister offered a generous package of corporate tax cuts and investment tax breaks. The result was an unprecedented rally, recovering most of the losses since the Union Budget.

All this volatility in the market raises a much bigger question. How would this volatility impact your mutual fund strategy? Are you still to stick with the mutual fund strategy you started off with or should you tweak that? Should you look at internally shifting your portfolio mix? Here are a few key takeaways to handle your mutual fund strategy in the midst of volatile markets.

Your long term goals are still your long term goals; so don’t overreact
The first message is not to lose sight of your goals. Normally, each of your mutual fund holdings is tagged to some long term goal like retirement, child’s education, nest egg creation etc. Since your goals have not changed, there is really no crying need to make big changes to your mutual fund strategy. Long term financial plans have in-built risk management mechanisms which permit the mix to be automatically tweaked based on exposure. Put your financial plan on auto mode and don’t tamper too much with that.

SIP is the answer; all the more so in volatile times
It is hard to catch the tops and bottoms of the market. Hence a more rule-based approach like the SIP will work better in volatile times. Over a longer period of time, the impact of timing the market is minimal and even that is assuming that you consistently time the market to perfection. Stick to SIPs because in volatile times, you gain both ways. Higher NAVs means more value and lower NAVs means more units.

Use the rallies to exit and the dips to accumulate
This is an interesting approach shift that you must make. Over time, you tend to acquire funds that are concentrated in certain sectors or funds that are too volatile. High beta funds are a classic example. You may also be carrying funds that have been inconsistent performers in the past. The volatility gives you opportunities both ways. Use the rally to actually clean your portfolio and make it more aligned with your long term goals. Use dips to buying into segments you are under owned.

In your debt fund mix, reduce credit risk and duration risk
The market expectation in the midst of this volatility is that the government will have to go for additional borrowings to make up for the corporate tax giveaways. Higher borrowings will mean higher bond yields. So if you are overexposed to long duration bonds in your portfolio, it is time to shift to either floating rate funds, or to short duration funds. This will help you play the bond market volatility better. Also, in volatile times, credit risk funds are the most vulnerable and are best exited.

Gold ETFs are a good bet to diversify
Gold has been a hedge of last resort for most portfolios. Even as the government has eased taxes, the global uncertainty has hardly changed. Not to forget that gold has normally been a big beneficiary of stock market volatility. The current volatile situation is ripe for gold to continue its outperformance. While you don’t need to splurge on gold ETFs, a good hedge would be to increase gold in your portfolio closer to the upper limit of 15%.

Time your milestone reallocation better
When mutual funds are pegged to goals, there is something called milestones that you need to take care of. It is always prudent to get into low risk investments and liquid investments in a phased manner prior to milestones. If your milestone is 2 years away, then use this opportunity to maximize your equity returns and reallocate. You are not taking any active call; just timing your reallocation better.

The moral of the story is that your mutual fund portfolio need not be bothered by these bouts of volatility. You can, however, use it for smart re-allocations!

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