Choosing MFs in volatile markets

For those who shy away from the volatile equity markets, experts’ advice is to take the mutual funds route. During the period of steep correction , both direct investors in the market and mutual fund investors suffered losses.

The investor mood is on an upbeat when the market is booming. But during a fall, they tend to panic. New investors simply sell everything and quickly get out with losses. However, seasoned investors look for opportunities even in volatile markets.

Here are a few points to keep in mind when investing in mutual funds in volatile conditions:

Diversify

Ride through the volatile markets by amply diversifying across different categories, sectors , segments, schemes and fund houses. However, overdiversification too brings with it a bundle of woes. Through effective diversification, an investor can achieve his risk/reward objectives and reduce risk effectively .

Go long term

Have a long-term perspective. Only those who need money urgently sell their lot in a distress market condition. Otherwise, stay invested. The volatile markets will stabilise soon. If you decide to invest in a diversified equity fund with a strong track record, remember to stay for the long term. These funds will bounce back once the markets pick up steam.

Mix of funds

Build a strong portfolio with the right mix of funds. The fund manager plays a critical role in the selection of stocks that make up the fund. Some people end up with similar funds from different fund houses, with the same objectives . Like two large-cap growth funds from two different fund houses. This simply represents two funds from the same fund category . The result is inefficient diversification.

Regular investing

Investing regularly in systematic investment plans, irrespective of market behavior, will help you manage volatility. Investing a small amount every month will bring down your risk tremendously . Otherwise, some investors who get the timing wrong could invest a lump sum when the markets are at high levels.

Defensive stocks

A falling market is not appealing to the investor. He can wait till the downside ends. The more adventurous can invest in funds that in turn put the money in defensive stocks. Defensive stocks are not significantly affected by factors that make the markets volatile. However, it is tough to say how high these will soar in an upswing. Defensive stocks are least influenced by market trends.

Reduce risk

Reduce your exposure to risk and anticipate less reward. It makes no sense to expect big returns out of volatile markets. Taking too many risks can consume your hard-earned money.

Discipline

Strict investment discipline is critical for those who intend to ride safe and see profits. Spontaneous investors seldom get the timing right and can turn out to be big losers. How regularly one invests dictate the difference between a loser and a gainer.

Source: The Economic Times
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