How You Can Protect Your Mutual Fund Portfolio from a Storm?

The COVID-19 pandemic is by far the biggest trigger event of our generation, which led to public health crisis, economic collapses, job, and business loss, financial challenges and many investors saw decline in performance of their investment portfolio due to high market volatility.

The current situation in India where the Indian Meteorological Department (IMD) has warned the coastal regions such as Gujarat, Maharashtra, Kerala, Karnataka and Tamil Nadu of 'Cyclone Tauktae' which may intensify into a severe cyclonic storm causing heavy rainfall with gusty winds.

In the wake of cyclonic storm, the COVID-19 vaccination drive in these regions are on hold past two days to prevent any inconvenience to citizens. However, this reduces the pace of faster vaccination to reduce the spread of virus and support economic revival. This was an unprecedented event and none of us expected this during the summers, following the news, respected states were warned to take cautious steps.

Similarly, a financial storm might strike unexpectedly, wreaking havoc on your investment portfolio. While you can't predict the future or control all of the elements that lead to a situation's occurrence, you can make wise decisions to be well-prepared. This will assist you in avoiding and reducing losses that may have occurred in your portfolio as a result of an unforeseen event.

You see, when it comes to one's investment portfolio the fear of impacts with high volatility that occurred amid the pandemic is still oscillating in the minds of some investors. Now to counter such financial crisis similar to COVID-19 pandemic, which has shaken your confidence in your financial plan you will be required to make some change in your portfolio.

Being an investor you have acknowledged that the future is uncertain, but you can plan and account for such trigger events through your investment management framework.

Consequently, you can take precautions to safeguard your mutual fund portfolio from a market crash, a financial storm, or even a global pandemic. Being well-prepared and diversifying your assets are two critical parts of a strong defensive plan that can help you weather a financial storm.

​Here are some ways to protect your investment portfolio from a financial storm:

1. Align your investments with financial goals

You can start by broadly examining your entire investment portfolio and then carefully scrutinising each holding after factoring in its specific objective. While equity mutual funds are long term investment vehicles, short term volatility may not concern you to redeem or stop your investment in equity mutual funds.

Some mutual fund schemes could be long-term for capital appreciation while others could be aimed at shorter financial targets such as a children education, or international vacation. You must determine the extent of risk you can take depending on factors like age, income, dependents etc. and your financial objectives before investing in any mutual fund scheme.

While choosing your mutual fund investment schemes ensure your investment style if aggressive on equity or conservative and choose both equity and debt schemes by assessing its quantitative and qualitative parameters. It is important to remember that every investment must have a purpose that is consistent with your financial aspirations, risk tolerance, and time horizon.

2. Re-check your asset allocation strategy

During the process, re-check your asset allocation plan the overall asset allocation of your portfolio based on your risk tolerance can stray over time due to the market dynamics. In addition, as per historical data no two-asset classes perform in the same direction always and thus, your portfolio must be spread across asset classes such as equity, debt, gold and cash to generate better-risk adjusted returns.

Some of the mutual funds may outperform others, which can make your portfolio either too aggressive or conservative. Rebalancing the portfolio with a few tweaks is a good idea to minimise the potential risk. For example, if your portfolio has concentration of long-term equity funds, you may try to add debt securities to the portfolio with liquid and short-term investments to create stability and steady growth for volatile markets and unforeseen contingencies.

3. Diversification

Diversifying your portfolio is the most important measure that you can take to protect your mutual fund investments during volatile market conditions. When you will diversify your portfolio across market capitalisation such as, Large-cap Funds, Large & Mid Cap Fund, Mid Cap Fund, Multi Cap/Flexi Cap Fund etc. your risk on the overall portfolio reduces.

Moreover, diversification helps achieve favoured risk return objective and you should diversify based on your financial goals as well. So, by diversifying your mutual fund portfolio you mitigate the risk across different investment styles (growth and value), stocks, sectors, industries and even geographic regions by investing in international funds.

However, investing across too many asset classes relative to the size of your mutual fund portfolio would be over diversification, which may impact the gains and limit your returns.

4. Monitor your portfolio regularly

Now that you have constructed your mutual fund portfolio, periodic review and rebalancing of portfolio strategy is as critical as deciding on the right asset allocation. When you periodically review your portfolio, you can evaluate the performance of your investments vis-a-vis the benchmark as well as the expected returns.

Such reviews of your portfolio helps you understand if any schemes is consistently lagging in terms of risk-reward parameters across market phases then you may consider replacing it with a better alternative scheme. This periodic review and rebalancing will help you shield your portfolio from a severe bear market.

Also, evaluate your investments across asset classes and see if it still matches your risk profile and the time horizon required to achieve your goals. Not only analyse your portfolio during market rally but also check if your portfolio has achieved the desired asset allocation and if the weightage of one asset class has increased or decreased due to market movement.

5. Invest through rupee-cost averaging method

The main vehicle to invest in rupee-cost averaging is or Systematic Investment Plan mode (SIP), it helps reduce the volatility factor, and as a result overall gain increases on your investment portfolio. With the help of SIP that is light on your wallet, you can invest as low as Rs 500 per month this will be beneficial for investors will low investment amount.

The rupee cost averaging method is the cost at which you buy units of stocks or mutual funds and it gets balanced out. It is an approach in which you invest a fixed amount of money at regular intervals. This in turn ensures that you buy more units of a mutual fund scheme when markets are low and less units when markets are at high.

Along with this, you need to maintain liquidity in your portfolio such as keeping investments in liquid and easily accessible asset classes. To maintain adequate liquidity when you hold high volatility products, you may consider having a cushion of liquid funds and short-term investments, which you can easily access in times of emergencies, and this will protect your portfolio from downside risk.

Having said that, it all depends on the construction of your investment management framework and how you maintain your portfolio across various market cycles. An investor must built a robust portfolio strategy and construct an all-weather portfolio to survive any storm.

Therefore, you must focus on constructing a well-diversified mutual fund portfolio, which includes selection of worthy mutual fund schemes that will generate better risk-adjusted returns, and the above-mentioned points will help you to protect your mutual fund portfolio from a storm.

Happy Investing!

Warm Regards,
Mitali Dhoke
Jr. Research Analyst

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