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Why Should You Let Your Mutual Funds Sail Through the Storm of Declining Phase?

Updated on February 16, 2018
Rishit Kakkar profile image

Freelancer and a financial planner, has helped many individuals and entities in taking a wise decision to attain a financially stable life.

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“A ship is considered to be safe at the shore, but that’s not what it's built for.” The saying holds true meaning in the world of mutual funds too. Industry experts speak several times about the benefits that the investments in mutual funds can provide to the investors. However, analyzing the current situation in India, a few of them are flashing warning signals concerning the equity market. The market is at its peak, and the situation has lead to the occurrence of a little bit of euphoria and a lot of froth. Some are even referring the period to as the boom phase which follows the bubble phase, quite similar to the one in the year 2007, and the rest is the history!

To sum it up, there’s no denying the fact that if the corporate earnings do not favor the market, then the mutual fund weather will soon turn out to be stormy. Now, it's the investor who gets to decide to move away from their planned route of investment and be in the safe grounds or trust the experience of their respective fund managers and stay on the course.

A Few Answers That Investors Might Be Looking for

The situation might create continuous ebbs and flows in the life of investors, and they might be dealing with several concerns. But, as there is no end to the queries that the mind can produce, here’s the answer to the few common ones.

1. What Is the Need to Stay Invested Even in the Changing Market Cycles?

The simplest thing to do is get easily swayed when the market experiences volatility and do away with the investments in the middle. However, considering the historical reality, it is much rewarding to stay the course and remain intact during the changing cycles. This increases the probability of fulfillment of your financial goals than the situation when you decide to exit owing to panic.

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You won’t be able to enjoy the true advantage of a long-term investment strategy until you remain committed to the plan that you build for yourself. Make sure you don’t let your emotions be a part of your investment and this way, you’ll be able to dodge the critical mistakes.

It’s a fact that holding on your investments in equity for ten straight years reduces the level of volatility than staying invested for just a year or two. The changes caused by the market cycles are not necessarily adverse. However, one should know how to use the transition to one’s advantage. Keeping an eye on the long-term goals is the best and the only way to calm the jitters that are caused by the short-term fluctuations.

2. The Fund Is Losing its Strength, Is it the Time to Switch?

Studying the current period where the fund returns often receive short-term fluctuations, liquidating one’s holdings may not be the best idea available. Further, it is also not the case always that the new fund in which you decide to switch will perform better than the previous one. Who knows that the old one which you left in the middle turns around its fortunes?

To make the right decision during such circumstances, it is advised to compare the fund’s performance to similar funds and a suitable benchmark. While switching, do not merely consider the rate of returns as it may look enticing, but there are several ins and outs of redemption of your mutual funds like the exit loads, tax charges, etc., that should be taken into account.

Mutual fund investment is a great way to chase a goal with investment; however, it is vital to remember the intent with which you started out. When you can find the path which can assure you the fulfillment of your investment objective, the questions whether to switch or hold are automatically answered.

3. What Is the Role of Patience in Mutual Fund Investment?

As the market swings up and down, investors tend to be more focused on the day-to-day returns. However, it is an incorrect approach. I would suggest avoiding overestimating the effects of short-term fluctuations, instead, think long-term. An efficient method to do it is to stay invested even at lower prices. Balance can be a key here; as you are the only one who can decide how much risk you can bear. Being patient and staying invested through the lows and highs can be far more rewarding situation than trying to time the market. If you wish to seek a better approach, go through the SIP route, and invest in small proportions at regular intervals.

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Further, as giving too much importance to the short-term losses and profits is unwise, so is ignoring the investments completely. Keep a check on your portfolio at least once or twice a year. This should be more frequent when the market is oscillating fast.

It’s even better to seek an expert’s advice on a personal level while choosing the investment options. Don’t hesitate to rebalance your financial portfolio to bring it back in line with your investment goals and risk-bearing capacity.

4. When Is the Right Time to Consult an Expert?

Well, the answer is ‘right now’! You cannot take your money-matters lightly, and let’s be honest, not all of us have the same level of expertise in the financial aspects. If you too belong to the category where the people are unacquainted, follow the guidance of an expert. Their experience might help you navigate smoothly through the volatile market.

Hiring a financial advisor is the recommended way to ease the pressure of managing mutual funds. They can tell the real difference between small market movements and specific market events. They can further assist you in making the right and unemotional decisions that go well with your monetary targets.

In addition to it, stick to one good financial expert instead of seeking multiple advice from different people. He/she can help you choose a basket of products which are tailored according to your comfort and life objectives. The one who continually puts your interest at the top priority will view your investments and know when to rebalance it on an ongoing basis.

Experts’ Take on the Situation

  • No one can precisely predict what the peak market can look like. Thus, investors who are willing to invest can take the route of equity schemes, but for a long-term horizon, say around seven to ten years. By doing this, they can iron out the volatility.
  • Don’t lose patience as this is not something expected from stock market investors. Equity investments usually provide high returns in the long term; thus one should not just fear the declining stage and disturb the maturity of the stocks that they have earned in the duration by selling them in the heat of the moment.
  • Investing in less-risky funds can be a better option than redeeming your investments. Time plays a vital role in mutual fund investments, thus don’t waste the opportunity in hand due to over-thinking. Instead, invest in less risky funds and attain sustained and stable growth through your investments. If you are planning to make your first step in the mutual funds, then start with investments in moderately risky funds and earn good returns with regulated risk.

The bottom line is to let your investment experience the tides of the changing weather, and that’s the only way to reach the goal with which you set out on the journey. Mutual funds are equipped well when it comes to facilitating the achievement of your investment goals.

Before winding up, I would like to tell you to be patient and positive. Remember, mutual fund investment is like a roller-coaster ride, here you’ll only get hurt if you try jumping off in the middle of the ride.

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