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How can mutual fund investors tackle market volatility
Posted by : Anonymous on Dec 21,2016 11:24 AM
Stock markets are going through a volatile phase.Trump presidency, demonetisation, likely Fed rate hikes... the market has plenty to worry about in the coming days. Obviously, a prolonged volatile phase tend to worry even the mutual fund investors. How can they tackle the volatility in the market?
Control your nerves
Of course, it is extremely difficult to stay calm when you see the value of your investments going down sharply. However, you should remind yourself that selling your investments and running away from the market would not solve the problem. "Avoid nervous actions," says Saurabh Mittal, CEO, Circle Wealth Advisors.
Investors should remind themselves that volatility is a part of investing in stocks. One just cannot avoid it. But if you have done your financial planning and allocated funds to meet your various goals, you should stay put irrespective of short-term hiccups in the market. Remind yourself that such volatile phase would help you to buy more mutual fund units and add to your returns over a long period.
Stick to your goals
"If your goal is ten years away and you are investing in the right scheme, you don't have to worry about volatility. Ten years are long enough to offset short-term volatility effects," says Mukund Seshadri, Co-founder, MSVentures Financial Planners. He says most investors don't do their research or fix their goals, cash flow, investment horizon, etc. If they devote more attention to these aspects, then they won't be spooked by short-term volatility in the market.
As said before, if you have invested in an equity mutual fund to meet a financial goal that is ten years away, there is no reason why you should be perturbed by a volatile phase in the market. You would come across such phases many times during your investment journey. But when you look back after 10 years, the current phase won't look as daunting as it appears now.
Rebalancing the portfolio
This is an advice you may come across every time the market goes through many ups and downs. This is because your asset allocation may change when the markets move up and down. However, mutual fund investors should proceed with caution on this front. Ideally, they should review their mutual fund portfolio once in six months or a year.
"Technically, it doesn't make sense to re-balance your portfolio if the allocations vary within a margin of /- 10 per cent. Re-balancing once in a year is sufficient," says Mittal.
For example, if you invest 50 per cent in various equity mutual fund schemes and 50 per cent in various debt schemes as part of your asset allocation. After the stock market fall, your allocation to equity schemes might have fallen 40 per cent. In such a scenario, you can rebalance your portfolio to match the original asset allocation plan.
Don't lose the bigger picture
Don't look at your mutual fund investments alone, look at your total wealth," says Mittal. When you concentrate specifically on your mutual fund investments, or investments in a particular category of schemes, you feel more nervous when its value goes down. You start to think that your wealth is getting wiped out.
However, if you take a look at the entire portfolio, you might find that while your equity mutual fund investments are going down, the debt part of the portfolio or your gold investments are performing great. This is why you should have a diversified investment portfolio. You should pick your investment options depending on your goal, investment horizon and risk-taking ability
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