Stock market investors? If you take this step, you will lose money
Exiting a turbulent market prematurely could lead to losses, especially in equities and equity-related investments.
Market turbulence is often the reason why investors make premature exits from their market-linked investments. In the process, they deprive themselves of the advantages of regular long-term investments. More often than not, they also exit, making losses. This is especially true for investors in equities and equity linked funds. So, what should a mutual fund investor do with his investments during times of turbulent markets?
Keep financial goals in mind
The objective of your investment is not just to generate the highest returns from some investments, but to save enough for your goals. You can do this when your investment portfolio, consistently does well.
During volatile markets, check whether the market situation is impacting the progress towards financial goals and making changes will help. If you have been investing for five years for your child’s higher education and need the money 10 years from now, current market turbulence will hardly matter in the long run.
Be loss averse, not risk averse
During volatile markets, most investors forget that higher risk investments need not necessarily be loss-creating. For instance, many studies have revealed that equity investments eight to 10 years old or more, typically provide high returns. Ironically, investors lose out the most when they make premature exits in panic, during volatile markets or sharp market downturns.
So, the key is to avoid doing things that make you lose out and not be averse to higher -risk investments that reward you in the long term, helping you to save for financial goals, be it children’s education or retirement.
This might sound ironical, but you can take advantage of volatile markets and prosper. When you invest in MFs versus direct stocks, the scheme diversification ensures that any fall in the market gets cushioned. In addition, Systematic Investment Plans (SIPs) of MFs offer a perfect tool that helps you take advantage of market volatility.
Lesser units are bought when markets are high and more units are bought when markets are low. In the process, over time, your average cost of buying the units goes down, and you profit from regular investments. Many investors in SIPs tend to stop or exit from SIPs during volatile markets. Ironically, it is the exact opposite that they need to do, that is carry on with the SIP.
Evaluate performance correctly
The most common mistake MF investors make is not comparing their investment’s performance with the scheme’s benchmark and peer schemes. So, in case of an investment in a large-cap equity scheme, you need to compare the performance with the scheme’s benchmark and comparable large-cap schemes.
It is important to note that different MF schemes in the same category will react differently depending on their risk profile. Trust the fund manager to take care of the volatility in their segment. Making comparisons with individual investments like a particular stock or an asset class, such as gold or real estate, often causes unnecessary panic.
Rebalance your portfolio
If the balance in your portfolio has got tilted in favour of one asset class, correct it during your periodic review. It is especially important to do so in a volatile market. Investors should proactively shift their funds from asset classes which are over-weight to other asset classes which are under-weight in the portfolio.
In case you want to add new MF investments, ensure that they are aligned to your goals and the new investment will add a new aspect to your investment mix.
Watch this Zee Business video
It might sound counter-intuitive, but it’s true. During volatile markets, investors have the urge of doing something to respond to the situation. Whereas, more often than not, the best course is to simply do nothing, provided you have proactively recalibrated your portfolio.
By: Mahesh Patil
(The writer is co-CIO, Aditya Birla Sun Life AMC)
Source: DNA Money