How to Invest in Mutual Funds amid Volatile Markets
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Since June, the government started reopening the economy in a phased manner after over two months of strict lockdown to control the pandemic. Consequently, business activities started to gather pace. This set a rally in equity market over the past couple of months which provided some solace to investors post the COVID-induced market crash.
However, the pandemic situation seems to be worsening with each passing day and still remains a challenge for the economy. The total virus cases in India has now multiplied to over 55 lakh, with around 10 lakh active cases, second only to the USA.
As a result, while most sectors have been unlocked, they are operating at a limited strength and not fully functional. Amidst, weak earning numbers due to Covid-19 lockdown, the trail P/E of the Nifty 50 index has shot up to over 32x levels, which is certainly an expensive zone. A high valuation signals that a correction may be on the cards.
The Indian economy was among the worst hit due to the lockdown and thus, while there will be some revival in the coming quarters, rating agencies still see a major contraction in GDP growth in the FY21. This is likely to weigh on the investors' sentiment.
Graph: Equity market have turned volatile after recent rally
Data as on September 22, 2020
(Source: ACE MF)
Moreover, global cues that affect the domestic equity market have not been encouraging either. Various countries like UK, Spain, Germany, etc. which earlier seemed to have tamed the virus outbreak are now seeing resurgence. Fresh lockdowns are being imposed in these countries to control the spread of disease, adding to uncertainty regarding timeline of global recovery.
Few other factors such as geo-political tensions prevailing between India and China, forthcoming US Presidential election, rising global debt, etc. are likely to add to the uncertainties and keep markets volatile. The wait for broad-based market rally could get longer.
How to approach mutual funds now...
As an investor, we cannot control how these factors impact the market, but we can surely take steps to mitigate its impact on our mutual fund portfolio.
It can be disappointing to see low returns on your equity mutual fund investment but it is important to hold on to your investment to achieve your financial goals. As and when economic conditions start to stabilize, the same will be reflected in stock prices across broader market caps, and thereby your mutual fund returns.
If you have a short term investment horizon it would be better to avoid investing in equity mutual funds and prefer low duration debt funds and/or bank deposits.
However, with interest rates on downward trend it is important to stay invested in equity mutual funds for your long term financial goals. Invest in a well-diversified portfolio of equity mutual fund investment across categories and investment styles based on your investment objective, risk appetite and time horizon to goal.
( Image source: photo created by jannoon028 - www.freepik.com)
A well-diversified portfolio of equity funds will not only help you sail through market downturns but also reward you during the growth phase. But since committing a lump sum amount can be risky, invest regularly through the SIP mode. The higher number of units accumulated through SIPs during market downturn will most likely rise sharply in value when the problems subside and average out your overall investment.
While holding to your investment for long term is crucial to create wealth and achieve your envisioned financial goals, you cannot afford to practice a 'buy and forget' approach as it could do more harm than good to your investment portfolio and wellbeing. Therefore, make sure to conduct a periodic review of your mutual fund portfolio to weed out the consistent underperformers and rebalance if necessary.
Construct your portfolio in such a way that it works under all market conditions.
Here is how you can create an all-weather portfolio...
At PersonalFN, we believe following the time-tested Core & Satellite Approach, a strategy followed by some of the most successful investors, would help you build a robust all-weather portfolio with the best equity mutual fund schemes.
The 'Core' holding should comprise around 65%-70% of your equity mutual fund portfolio and consist of large-cap fund, multi-cap fund, and a value style fund.
Whereas, the 'Satellite' holdings of the portfolio can be around 30%-35% comprising of a mid-cap fund, a large & mid-cap fund, and an aggressive hybrid fund.
To build a 'Core & Satellite' portfolio of some of the best equity mutual fund schemes, here are some ground rules:
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Consider funds that have a strong track record of at least 5 years and have been amongst the top performers in their respective categories
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The schemes should be diversified across investment styles and fund management
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Ensure that each selected scheme abides with its stated objectives, indicated asset allocation, and investment style
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You should not only invest across investment styles (such as growth and value) but also across fund houses
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The mutual fund schemes should be managed by experienced and competent fund managers and belong to fund houses that have well-defined investment systems and processes in place
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Not more than five schemes managed by the same fund manager should be included in the portfolio
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Not more than two schemes from the same fund house shall be included in the portfolio
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Each scheme that is to be included in the portfolio should have seen an outperformance over at least three market cycles
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You should restrict the count of mutual fund schemes in your portfolio to seven
Once you create an all-weather portfolio, monitor it at regular intervals (bi-annually), rather than timing the market. Following such an approach to mutual fund investing tends to work well in the long run.
Here are six advantages of the 'Core & Satellite' Approach to investing:
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Provides optimal diversification
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Lowers the need for constant portfolio churning
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Reduces the risk involved in your portfolio
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Helps you benefit from a variety of investment strategies
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Allows you to create wealth cushioning the downside
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Holds the potential to outperform the market
If you wish to invest in a readymade portfolio of top recommended equity mutual funds based on the 'Core & Satellite' approach to investing, I recommend subscribing to PersonalFN's Premium Report, "The Strategic Funds Portfolio For 2025 (2020 Edition)". This premium report will help you build your optimum mutual funds portfolio for 2025 with no effort on your part. If you haven't subscribed yet, do it now!
Happy Investing!
Warm Regards,
Divya Grover
Research Analyst
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