Know how to deal with the ups & downs of equity mutual funds

Equity markets are sometimes performing, while at other times they are underperforming. Such is the nature of  equity markets which may seem quite volatile in the short run, but in the long run, they have always normalized and delivered for their investors. Although the 2020 global pandemic saw the equity markets underperform for quite some time, they have remarkably recovered ever since. Retail investors can actually take advantage of market fluctuations and can try and benefit from it by investing in equity mutual funds. 

Here are a few ways for investors to deal with their equity mutual fund investments when the markets are fluctuating:

Try focusing on long term equity earnings

Equity mutual funds may seem volatile because they tend to fluctuate from time to time in the short term. The performance of an equity mutual fund is correlated to the performance of its underlying stocks. Although the performance of your equity fund may seem poor at the moment, it may allow you to create wealth over the long term. Hence, while investing in market linked schemes like equity funds, investors must focus on long term earnings and not panic over the scheme's poor short term performance.

Increase your investment when the market falls

Sometimes, investors are riddled with emotions when the markets are low and their investments are underperforming. Fearing that they will lose all their invested sum, they withdraw their investments even though they are facing losses. Investment decisions should never be based on human emotions. If the market is bearish, investors may consider this as an opportunity to invest more as during this time the NAV (Net Asset Value) of most market linked schemes is low, and they can buy more units. The market cycle keeps changing and when the market finally turns around, the value of your units might increase. Remember that redemption should not be on your mind when the markets are down. Instead you chould try investing more depending on your risk appetite.

Adequately diversify your investment portfolio

A simple way to mitigate your overall investment risk is by diversifying your mutual fund portfolio across various asset classes. You may have already invested in equity, but you may also consider investing in debt mutual funds or even gold mutual funds that can act as a hedge against falling markets. Gold and equity markets have an inverse correlation which means that, if one asset class is performing, the other might not be doing so well and vice versa. If you have only invested in domestic equity markets, you may explore opportunities of investing in foreign markets through international funds. Equity markets of different countries move differently and in a scenario where the domestic equity markets are volatile, your investments in foreign funds may continue to generate capital appreciation.

Consider starting a SIP for long term wealth creation

If you do not wish to time the market and instead wish to invest regularly in equity mutual funds, you may consider starting a SISIP in equity funds. A Systematic Investment Plan or SIP is an investment plan which allows retail investors to save and invest a fixed sum at regular intervals (typically, every month). Here, investors are required to decide the investment amount and then select a date on which they will be investing this sum every month. Post this, every month, the investors can invest this fixed sum in an equity scheme of their choice. SIP might be a simple and easy way to invest small sums rather than exposing your entire investment amount to market volatility right from the beginning. It is also an easy way to inculcate the discipline of saving.

SIPs allow investors to buy more units when the NAV is low and lesser units when the NAV is high. This investment technique is known as rupee cost averaging that may average out the cost of purchase in the long run. Investors can also benefit from the power of compounding if they continue their SIP investing journey for the long haul. Some investors who are not sure about the sum that they need to invest in mutual funds via SIP can refer to the SIP calculator, a free online tool that can be used by anyone.

Even seasoned investors find it difficult to time the market and hence new investors should not worry about the daily fluctuations in their equity mutual fund investments but instead they should focus on long term investing via SIP.

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