scorecardresearchHow to shuffle equity fund investments during a market correction?

How to shuffle equity fund investments during a market correction?

Updated: 25 Feb 2022, 02:55 PM IST
TL;DR.

Identifying risk profiling and asset allocation to gain maximum from a market correction

Stock market movement during a bull run

Stock market movement during a bull run

Not many investors can view the stock market correction on a positive note. For some, it is nothing short of a nightmare as they see their stock portfolio going down in deep red and their equity mutual fund investments also meeting the same fate as them. Most beginners who invest in equity funds for good returns are appalled at the rate at which the value of their funds fluctuates in response to the market. Investment and tax experts constantly reiterate how equity mutual funds are subject to market risks and one must read the documents carefully before investing. 

Investing in equity mutual funds

Many mutual fund investors park their money in equity market instruments based on hearsay without reviewing their risk profiles. Apart, most investors tend to compare mutual funds’ returns only without viewing their respective portfolios, asset allocation, investment goals, time horizon, and other relevant details. What most fail to understand is that what works for one may not work for others. The rules for investing in equity mutual funds are different from parking money in conservative instruments that are comparatively steady.

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Elucidating the significance of risk profiling, Raj Khosla, founder and managing director, MyMoneyMantra, shares, “Risk profiling is important to determine asset allocation for a portfolio and to correlate the same with the risk-taking capacity of an individual. Major factors defining risk profile are investor’s age, time horizon of investment, loss bearing capacity, and cash flow requirements. Risk appetite will keep changing with situations of life and therefore one should re-evaluate the same periodically.” This means that once investors have identified their risk appetite, they can proceed on to the next most important aspect of an investment, i.e., asset allocation. 

Understanding asset allocation is important as not all equity funds appropriate the same percentage to equities. Also, while some funds apportion a major chunk of their investments to large-cap stocks, others rely on stocks of mid-cap or small-cap companies to earn returns. Stressing on why investors must pay attention to the various funds’ asset allocation strategy, Vinit Pagaria-Head - Data and Research, StockEdge says, “A market correction provides an opportunity to invest in quality companies as well as equity funds. Large-cap funds are equity funds that primarily invest in the top 100 companies while small-cap funds have a dominant share of investments into small-cap companies (companies beyond the top 250 by market capitalization). The choice of small-cap and large-cap has to be at an asset allocation level, based on the risk-taking appetite of the investor, the tenure of the investment, and the overall valuation comfort across categories.”

Strategizing investment strategy during a market correction

Previous market corrections have underscored how small-cap mutual funds suffer the most shocks as compared to large-cap funds that are least volatile. Depending on one’s risk appetite, investors may increase or decrease their exposure to various funds during the bull or bear run in the market. 

Explaining the decision behind the choice of mutual fund investments, Pagaria added, “Over the last year, large-cap funds have typically generated returns of around 10-14 per cent while small-cap funds have rewarded investors with a hefty 25-40 per cent return, depending on the schemes opted for. Generally, large-cap funds would be less volatile and would be quicker to recover from a correction. On the other hand, the small-cap funds have the potential to generate a much higher return, albeit at a higher risk and higher volatility.” Investors looking for sharp returns can increase their exposure to small-cap funds and lessen their investments in large-cap funds to earn more when the market rebounds. 

Understanding the equity funds formula

You do not aim to be a millionaire within a fortnight by investing in equity mutual funds. A long-time horizon coupled with patience is important to gain the maximum by putting money in mutual fund investments. The 15×15×15 formula for mutual funds investments implies how an estimated yield of 15 per cent on 15000 invested systematically every month for a 15-year horizon or more can help to build a 1 crore corpus. 

Continued review of investments is an important aspect of one’s investment strategy. The importance of disciplined investments over a period must not be ignored. Once, risk profiling and asset allocation are done, the key is to choose the mutual fund investments for a particular tenure. 

First Published: 25 Feb 2022, 02:55 PM IST