7 Things to do when your Mutual Funds are in Red
When investors seek higher returns, they invest in equity mutual funds. A higher return comes with a cost, in equity it is Volatility. Mutual funds are affected when the markets are volatile and this is why your mutual funds are going up & down.
Now many times when the market is volatile, such as now, investors panic and take decisions that may not be in their best interests. If you are an investor and wondering what to do with your investments in this situation, here are 7 things you can do instead.
This is the absolute first step to successful investing.
The stock markets usually perform well over a long period. In the short term, volatility causes the price to go up and down.
While you can lose money in mutual funds due to short term market disturbances, if you look at the long term, instances of negative returns drastically reduce after 3-5 years of holding.
If you have a longer time horizon of say 7-10 years, you need not get disturbed by the news around and lose your calm. Don’t let the noise get to you.
Avoid Redeeming In Haste
Can you lose money in mutual funds in falling markets? Yes. But does this mean you should redeem your investments? No. Think twice before redeeming your money the moment you see the markets perform poorly.
Certain investors believe they can take their money out of a mutual fund when its value goes up and then invest again when the value starts going down. This sounds good in theory but usually does not turn out well.
What happens most of the time is that people take out their money from a mutual fund and wait for the right time. But more often than not, the timing isn’t perfect. What ends up happening is that people sell when the price falls.
And then, when they plan to invest again, they invest at a price higher than what they sold their mutual funds for. This hurts the long term wealth creation process.
So decisions like redemption should not be a factor of current market conditions. Investing in equity mutual funds via the SIP route is what comes to rescue in such cases since SIP frees you from market timing.
It also leverages rupee cost averaging to buy you more units when the markets are down.
Compare Performance With Other Funds in the Same Category
You may feel the mutual fund you have invested in is not performing very well. This may or may not be a time when the markets are doing well.
A good strategy at this point is to check your mutual fund’s performance with mutual funds in a similar category.
Also, mutual funds are long-term investment options. If you observe your mutual fund’s performance is only slightly poor when compared to the best-rated funds, switching might not be necessary.
Over a short period, various mutual funds perform in different ways. In the long run, the best mutual funds belonging to the same category usually give similar returns.
Compare Performance With Other Funds From Different Categories
Certain mutual fund categories are more volatile. This means, while they might offer great returns, they can also offer higher risk.
If you feel you are not up for the risk, you should look at the performance of mutual funds from other categories.
For example, small-cap mutual funds give very high returns. But they also have a higher risk. Relative to small-cap equity mutual funds, large-cap equity mutual funds have been less risky.
Also, you might want greater returns and be willing to take the risk. In that case, too, you should explore the best funds in the other category for investment.
Research the Sector
Another reason why your mutual funds are falling could be because your investments are sector focused. This point is relevant to you only if you have invested in a sector fund.
Sector funds invest only in a specific sector or industry.
Sector funds are considered the riskiest for a reason – they are even harder to predict when compared to other equity mutual funds.
So if you have invested in a sector fund and are losing money, pay attention to the health of that industry and its prospects.
If you think the industry has a good future, continue to remain invested. If on the other hand, you think the industry isn’t doing well, you should plan to redeem your money.
This is perhaps the only way to counter your mutual fund loss at the moment. If your portfolio is exposed only to equity, then add some liquid/debt funds to the mix.
They will not only balance out your losses due to equity but will also allow you to raise money for short term goals. Also, diversify across asset classes.
Gold is considered as an excellent hedge against market volatility as gold prices usually go up when the markets are done. You can look at exposing about 5% of your portfolio to gold.
Can you lose money in mutual funds? The answer is YES. Should you have a knee-jerk reaction at seeing a red portfolio and make big decisions? Probably not. While the situation is uncomfortable, this too shall pass. Markets have bounced back before and this time also.
From temporary events like elections and geo-political tensions to recessions to pandemics, the economy has seen it all and thrived nevertheless. Investing is a long-term game and should be treated like one.
Stay calm, invest with a vision, keep yourself updated and you are good to go!