What to do with your mutual fund when market falls

What to do with your mutual fund when market falls and a correction happens



While some investors allow the SIP to continue, some prefer to stop their SIP. And investors confident about their investment go ahead and buy more in lump sum. Which of these is the best strategy?

Yes, the equity markets have fallen 8.66% (Sensex fall till June 12) in last three months and the volatility seen in recent times suggest that the equity market is searching for directions.

But surely, unlike 2008, the falls may not have been that sharp for you to notice. This is because, it was gradual, not more than about 2% a day at the most, and would not have been visible if not for the media bombarding you with stories of unwinding of positions in equities and macro-economic risks.

Well, that’s how bull market corrections happen. They are not sudden, nor swift; unlike the downturn seen in a year like 2008. For now, nothing internal in our economy changes; save for the fear below-normal monsoon and a risk of crude oil price rise. While we will have to watch what dimension these issues take, it is easier for us to look internally and assess where we stand.

In the Indian equity market - the correction, although not too deep, has brought the market close to fair valuations. For instance, the price earnings ratio of the Nifty is at 22 times, down from 24 times in early March. What does that mean? It means stocks are now less expensive than they were earlier. This presents better opportunities for fund managers to pick or average quality stocks. These corrections are necessary, good and prevent too much steam/bubble from building up. Do not be surprised if markets slide further from the current levels.

Still, a correction invariably bothers most investors. We have typically seen investors react to corrections in 2 ways:
- Some worry and stop or pause their investments or SIPs
- Some others want to plough more money on correction
Of course, quite a few, wisely, stay put! Here’s what we have to say to the above two categories of investors:

Stay the SIP course

For those who stop their investments or SIPs, our message has been the same; first, short-term blips hardly matter in the long run. You have to simply stay the course to reap the benefit of equity investing. For those running SIPs, it is more risky to stop investments when markets fall. It is the falls that provide opportunity to average costs. You deny your portfolio such an opportunity by stopping SIPs. Also, remember, by stopping SIPs, you are not only stopping ‘cost averaging’ but more importantly, stopping your very savings habit.

When to buy on dips

In the market over the last 3 months, from the peak on March 3, diversified equity funds have, on an average, fallen by 6%. Now, that is a decent fall to say ‘add more investments’. However, do not apply the buy on dip theory blindly. If you had bought a fund recently (through lump sum), then the current scenario may provide an opportunity to average. To illustrate, if you had bought say 100 units of a fund at Rs 55 NAV and it has now fallen by 6% to Rs 51.7; then buying another say 50 units would bring down your cost to say Rs 53.7 per unit. So you do average.

But had you bought the fund at say Rs 45 a unit, then averaging isn’t going to work; at least not in one shot. And unless market has a sustained dip, you may actually not average at all. You would have lost some paper profits yes, but still be on profits without doing anything. And in the long run, the blip would have been more than made good. Remember, the principles of averaging work straight enough in a stock – even if you bought it at slightly higher price than you original purchase price; as long as you see value at the price at which you buy. However, in a mutual fund – which is a portfolio of stocks that is ever-changing, there is no such thing as buying a ‘cheap NAV’. Yes, you may average your NAV costs over time; especially when it is linked to market corrections but such averaging should make sense. As illustrated above.

There is a third category of investors, we said, who do nothing. They are perhaps doing the wisest thing. If they ran SIPs, they would allow it to average by default. If they held lump sums and had a long term, the short-term gyrations should not matter anyway. And need we say, they make for successful investors!

Happy Investing

Source:Moneycontrol.com