Diversify your investment portfolio to survive volatile markets

Although a lot of us aspire to make investments in certain markets to get some returns, most of us turn a blind eye on the fact that they can backfire too. When markets become volatile, a lot of people lose hope and rush towards selling their investments without keeping in mind that they are leading themselves to even more losses. If you prematurely withdraw your investment schemes you may have to pay additional taxes, exit load and this will affect your capital appreciation. 

Mutual funds may help one achieve their financial goals, but some mutual funds like equity funds predominantly in equity, thus exposing your finances to the dangers of market volatility. But if you feel that only mutual fund investments are prone to risk and other investment schemes are risk free, you may be wrong on that point. Retail investors should bear in mind that just like mutual funds, every investment has some risk associated with it and no type of investment is ever considered to be entirely risk free.

However, if you are keen on surviving when markets turn volatile, you have to understand how to rebalance your investment portfolio and diversify in such a way that your finances do not get adversely affected. But before that, let us understand what mutual fund investments are.

What is a mutual fund?

A mutual fund is a pool of professionally managed funds where the fund manager buys and sells securities in accordance with the scheme’s goal and investment strategy. The money is usually invested across multiple asset classes including equity, debt, corporate bonds, and government securities, among other money market instruments. 

SEBI, the regulatory body of mutual funds in India states that a mutual fund is, “a mechanism for pooling the resources by issuing units to the investors and investing funds in securities in accordance with objectives as disclosed in the offer document. Investments in securities are spread across a wide cross-section of industries and sectors and thus the risk is reduced. Diversification reduces the risk because all stocks may not move in the same direction in the same proportion at the same time. Mutual fund issues units to the investors in accordance with the quantum of money invested by them. Investors of mutual funds are known as unitholders.”

How you might diversify your portfolio to survive volatile markets?

Choosing the right mix of funds is essential for long term sustainability. But before you go ahead and make investment in any schemes, as an investor you need to understand what is your investment objective. If you have long tergam goals like retirement planning, you may have to remain invested in for the long run. One good thing about long term investments is that they generally do not get affected by daily market fluctuations. Also, long term investments have the potential to beat inflation. Usually people with a long term investment horizon consider investing in equity funds because these funds have the potential to grow only when investors remain invested for a longer period of time. However, in volatile markets if you want you may reduce 10 to 20 percent from your equity investments. At the same time adding a debt or a hybrid fund to your portfolio may prove to be a good investment strategy. Debt schemes invest in fixed income securities while hybrid funds invest in both debt and equity. Adding these funds may balance the overall risk of your portfolio. In volatile markets, shifting your investments slightly towards debt oriented schemes may not be a bad idea after all. However, investors are requested to not get emotionally driven by market fluctuations and keep a long term horizon while planning mutual fund investments. 

Also, it is better to not solely depend on a single investment for meeting long term goals. Investors may spread their investments across multiple investment avenues if they want to navigate through volatile markets. Also, one should keep in mind that markets do not remain volatile forever. There is a phase where we feel that our investments may go down the drain but if you continue investing systematically, you may not have to worry about the current market vagaries.

It is better that you invest in mutual funds via SIP. Systematic Investment Plan or SIP is a systematic approach for regularly and disciplinary investing. With SIP all one needs to do is inform your bank and every month on a fixed date, a predetermined amount is deducted from your savings account and electronically transferred towards your mutual fund. Another good thing about SIP is that one can continue investing even with small amounts. You do not need a large principle amount to start investing in mutual funds via SIP.

It is true that mutual fund investments are subject to market risk and returns from these investments are never guaranteed. However if you invest smartly and remain patient with your investments, you too might be able to achieve what you seek. If you are completely new to investing, do seek some professional help.

Mutual Fund Investments are subject to market risks, read all scheme related documents carefully.