Can mutual funds be considered during a volatile market

Disclaimer: The views expressed in this article are those of the author and do not necessarily reflect the views of the Economic Times – ET Edge Insights, its management, or its members


Can mutual funds be considered during a volatile market

Irrespective of one’s risk appetite as an investor, market volatility is cause for much consternation; the looming uncertainty has become an insignia of the times that we live in and is a consequence of geopolitical headwinds. In such a scenario, how can investors limit short term downsides to investment?

Today, we are seeing a gradual increase in investor acceptance of short term volatility, most investors still consider downsides as a loss to their portfolio without considering the long-term outlook.  The waiting game however isn’t every investor’s cup of tea, and many investors would be considering investment options that help them reduce potential investment downsides.

A savvy mutual funds investor can take advantage of a volatile market by leveraging a diversified portfolio correctly.

A mixed mutual funds portfolio

Investment experts advise having a mixed portfolio of debt and equities with a predetermined portion of debt allocated to be switched towards equity in the event that the equity market somewhat declines. Similar to this, the percentage of the debt that has been moved to equity should be returned to its usual ratio once the market has stabilised and the volatility has subsided. If an investor has a diverse portfolio, they can benefit from such a tumultuous market, they claimed.

Consider a balanced advantage fund?

A balanced advantage fund is another type of mutual fund that can be beneficial in a volatile market.  BAF is within the SEBI-defined category of hybrid mutual funds. These funds are often open-ended mutual fund plans with the objective of protecting capital while providing adequate prospects for wealth accumulation. They invest in asset classes such stock, debt, and arbitrage instruments. Dynamically managing the exposure to equity, debt, and arbitrage ensures that the schemes continue to be equity-oriented funds with gross equity exposure (equity plus arbitrage) at 60 to 65 percent and benefit from equity taxation.

Focus on large caps

As an investor, one might be tempted to opt for small and mid caps as the potential returns are higher but so is the risk. In the current investment climate and given the volatile market, large caps are a safer bet when it comes to gains and mitigating losses. After all, being stuck in a market bloodbath can be an investors worst nightmare. The reason for large caps being a safer bet is because investments are made in businesses that are considered market leaders. Even in the instance of a market setback, the potential for recovery for large caps is significantly higher. In stark contrast, small and mid cap stocks can decline quickly and may find it difficult to recover.

Stick to the fundamentals

Investors must scrutinize a mutual fund’s fundaments with a meticulous zeal prior to making an investment decision. A tried and tested rule of thumb is to ensure the core fund portfolio is strong and investments are made in the best firms across industries. Undoubtedly, poor fundamentals ofa mutual shall result in losses and it is best that investors don’t take mutual funds at face value.

Avoid getting into FOMO

New fund offers (NFOs) by AMCs can be lucrative as they are initiated to raise capital. While they can make for attractive investment choices due to the potential of high returns, exercising prudence is the key. It is best to study any NFO carefully before making an investment decision. The risk factor for NFOs is also high as there is scant information available publicly.  It may be financially rewarding to invest in funds that offer something unique but investors must also assess the associated costs.

Reality check

The flexibility offered by the mutual fund industry is real, but there are a number of systematic and unsystematic hazards associated with the financial product. They can result from a variety of domestic and international causes, which can negatively impact their performance. While fund managers make every effort to reduce risks, you as an investor can do the same by using these measures.


Disclaimer: The views expressed in this article are those of the author and do not necessarily reflect the views of the Economic Times – ET Edge Insights, its management, or its members

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