A fall in stock market does offer some mouth watering opportunities for savvy investors. At the same time it frightens novice investors. In volatile times the emotions typically rule the actions of investors. Hence it is a must to be careful with one’s actions.
In the month of August 2015, stock markets around the world crashed and it virtually wiped out the gains of 2015 and a lot of investors may be feeling jittery regarding the future course of the markets.
With so much volatility in global markets led by China, there is enough reason to believe that Indian markets will also get affected to some extent. It is during such volatile times, one needs to be careful and not take hasty decisions regarding their mutual fund investments.
Warren Buffet famously said that “Be fearful when others are greedy and be greedy when others are fearful”.
To put the quote in perspective, one should not take any knee jerk reactions and avoid the following.
1.Shift your equity investments to debt:
You will find many analysts as well as some of your friends/ acquaintances who will now advise you that there is more market fall coming and you should now come out of equity to avoid losses and move your money to debt funds to protect your capital. Instead of following their advice you need to ask yourself, why have you invested in equity funds? Is this money meant for long term goals which are at least 5-6 years away? Haven’t markets fallen like this before many times in the past and still managed to give inflation beating returns to those who stayed put?
If the very reason for investing in equity funds is right, then you should not be moving your equity funds do debt now.
2.Moving all your debt money to equity funds:
Every investor needs to maintain a particular allocation to equity and debt, which is known as asset allocation. Debt provides safety when combined with an equity portfolio and prevents the overall erosion of capital in a portfolio. In case of any adverse emergency also you can safely withdraw from your debt funds and leave your equity funds to earn you better returns. If the market fall has reduced your equity allocation in your portfolio, then move your debt funds to equity to that extent to balance the portfolio. This will ensure that you are taking opportunity of the market fall and also rebalancing your portfolio which is essential to enhance overall returns in your portfolio. Don’t go overboard in considering yourself as different from the herd and commit all your debt money to equity. If the market volatility persists for some time and if you are in need of short term liquidity, you may have to sell from your equity funds as a loss. Always maintain a healthy debt -equity ratio as per your goals and risk profile.
3.Let me sell my mutual funds and move to stocks:
With such a huge market fall, many of the stocks would have definitely fallen more than the index. It will be tempting to invest in the stocks as most would perceive them to be now cheaper than earlier. How many of us have the knowledge and skill to decide if a particular stock is cheaper or expensive. There could be further downside in the index which might push those stocks even below the current levels. The very reason you are in mutual funds is to benefit from diversification and reduce your overall risk. By investing in stocks directly without any knowledge, instead of gaining you might lose big time, as speculation never pays. Some would also see the fall as an opportunity to make short term profit.
In times such as these, it makes sense to control your emotions and believe that if the asset allocation is right and your selection of funds has been appropriate then it’s just a matter of time when the tide will turn and you will benefit from remaining invested. We all have a short memory and forget that in the past too there have been more sustained and greater falls but with every great fall the possibility of better returns have only improved with time . Just focus on the right process, the returns will follow. Your sensible action rather than reaction will decide the fate of your investments in the long run.
Source - moneycontrol
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