Tips to deal with ups & downs of equity mutual funds
Young professionals who enter the job market newly wonder why go through the trouble of formulating a financial plan. The answer is that it will help you cover your personal expenses during retirement. Financial planning to put it simply involves planning your future expenses. The plans list out how much of your income should be kept aside for investment purposes and how much should you keep for yourselves. It is important to note that this plan will evolve as your financial condition changes.
While looking for investment options, you will come across mutual funds as one of the possible investment avenues. However, it is important to remember that they are not a monolith and in fact, there are numerous types of mutual funds available. Equity funds are one of them. This subcategory of mutual funds invests mostly in the stocks of various companies to generate revenue.
If you are opting for an equity fund, you need to remember that sometimes, equity markets perform well and at other times, they underperform. The nature of equity markets may seem quite volatile during the short run. However, in the long run, they stabilise and generate revenue for their investors. For example, like everything else, equity markets were affected adversely in 2020. However, they have remarkably recovered ever since. While it does not mean that there will not be a challenge in the future, you don’t need to liquidate your equity fund. Instead, there are some tips on what you should do to manage your equity fund investment when the market is going up and down. Listed below are some of the tips:
- Please attempt focusing on long term equity earnings:
Equity funds may look unpredictable because they tend to fluctuate regularly in the short term. The performance of an equity mutual fund is linked to the performance of its underlying stocks. So, even though the performance of your equity fund may seem slow at the moment, in the long term, it may allow you to accumulate wealth. Therefore, while investing in market-linked schemes such as equity funds, you must focus on long term goals and not panic over the scheme’s poor short-term performance.
- Increase your equity funds investment when the market falls:
There are times when an investor might be riddled with emotions when the markets go through a bear phase and their investments underperform. Fearing the loss of their invested sum, they withdraw their investments even though they are facing losses. Investment decisions should never be based on human emotions. Instead of withdrawing, you could consider investing more as, during a bear phase, the NAV (net asset value) of most market-linked schemes is low and they can buy more units. The market may finally turn around and when that happens, the value of your units might increase. Please remember that redemption should not be on your mind when the markets are down. Instead, you should try investing more depending on your risk appetite.
- Adequately diversify your investment portfolio:
It is very important to mitigate your overall investment risk by diversifying your mutual fund portfolio across different asset classes. While you may have already invested in equity, you may also consider investing in debt mutual funds or even gold mutual funds. Doing so can act as a hedge against falling markets. However, it is important to remember that gold and equity markets have an inverse correlation. It means that if one asset class is performing, the other might not be doing so well. Similarly, in case you have only invested in domestic equity markets, you may consider investing in foreign markets through international funds. Equity markets of different countries move differently. Therefore, if the domestic equity markets are volatile, your investments in foreign funds may continue to generate capital appreciation.
- Consider starting a SIP to create wealth in the long term:
Consider this. You do not wish to time the market and wish to invest regularly in equity mutual funds. In that case, you may consider starting a SIP in equity funds. A systematic investment plan is an investment plan that allows investors to save and invest a fixed sum at regular intervals. In SIP, investors are required to decide the investment amount and then select a date on which they will be investing this sum every month. After doing that, every month, an investor invests the fixed sum in an equity scheme of their choice. SIPs might be a simple and easy way to invest small sums rather than exposing the entire investment amount to market volatility right from the beginning. It is also an easy way to inculcate the discipline of saving.
Please remember that even seasoned investors find it difficult to time the market and therefore, if you are a new investor, please don’t worry about the daily fluctuations. Instead, please focus on long-term investing with the help of a SIP.
Disclaimer: Mutual Fund Investments are subject to market risks, read all scheme related documents carefully.