Choosing the right investment strategy during volatile market
Last Updated on November 29, 2021 by Chitale CFS Pvt Ltd
In the light of the volatility in the current market situation induced by the Covid-19 pandemic, it is important to select the right investment strategy and the type of the mutual fund investment. Below are some important approaches that you are likely to consider really useful when picking mutual fund investments in the current Covid-19 scenario.
Your risk tolerance in any investment is always checked during a financial crisis. For instance, if you invest in an equity mutual fund during such volatile movements and the market crashes, your portfolio is likely to show losses. Now, if you have a low risk appetite, you may be in a state of anxiety.
Typically, two things will cause panic if you have a low-risk profile. First, if you allocate more money in investments than your ability, you feel frustrated when the value of your investments falls slightly. Or second, if you invest in an instrument without knowing its optimal holding time. Suppose, for example, that you have invested in a mutual fund scheme for the short term, which actually demands remaining invested for long-term to achieve the desired result. In this case, with a low risk tolerance, you may not be able to handle any short-term market uncertainty.
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Mutual fund community believes that investments based on trust gained during the recent market recovery is trending, especially in the post-Covid economic environment. The mutual fund experts claim that these investors are motivated by the upward trend in the equity market. Disregarding the negative forecasts, the financial markets bounced from their lows within a month’s time. While the general tone of investors remain anxious and gains are wiped every other day, key indices have been moving steadily up for quite some time now.
Many investors are starting to realize that a sudden drop in the market is nothing to be afraid of, in fact it gives a good chance to optimize mutual fund portfolio. If market falls dramatically, it will instantly rebound as well. At least that’s what Indian stock market history shows us. Many brave investors claim that Indian stock markets have always recovered rapidly if there have been major market volatility, recession of 2000 as well as 2008 are best examples.
Even so, this may be a wrong approach to derive from the market movement. That is why there is always a justification for the regulatory disclosure ‘past performance does not guarantee future performance’ and choosing the right investment strategy is the key to achieve optimum returns on investment. Just because the economy regained much of its lost momentum rapidly in the past global recession, this does not guarantee that it will always work. Just imagine the losses if market doesn’t follow the similar pattern or the way you have envisioned? Are you going to be able to withstand the financial blow?
Many asset management companies trust that the markets are unlikely to impress the investors the next two quarters. The economic damage caused by the Covid-19 pandemic is likely to continue over the next several months, and we will see a substantial revival probably only next year. If this is the scenario, the market is expected to stay turbulent till then.
Investors should choose long term investment avenues in such turbulent environment. Investors should be aware of the challenges ahead on their job fronts and the effect of this recession on their financial health. Investing during Covid pandemic will make you think twice about taking substantial risk while investing in risky asset classes as fund managers are skeptical about the economic revival till the next year.
Mutual fund experts usually suggest entry level investors to adhere to comparatively less risky alternatives, such as large caps or multi-cap mutual funds investments. They also recommend investors to stay away from investing in risky groups such as mid-cap and small cap schemes during volatile market.
You should always choose a mutual fund based on your financial goals, investment horizon and risk profile. As a rule, you should stick to debt mutual funds that invest in fixed income securities to take care of your short-term goals that are below five years. Always choose a debt scheme based on your horizon and risk-taking appetite. For example, you should choose a liquid scheme to park money for a few days or weeks. If you are investing for a few months, you may choose an ultra short duration scheme as the best investment strategy.
Consistently putting a small sum in an equity mutual fund scheme is the easiest way to build a significant corpus. Equity (or stocks) has the ability to deliver higher returns for a long period of time than other types of securities. It also provides better post-tax returns and that too by beating the inflation, which is very necessary to build wealth to achieve financial goals like child education planning, child marriage, retirement planning as planned. To make this possible, you will need to to invest on a regular basis, regardless of market volatility.
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Mutual fund investments are subject to market risks. Please read the offer document carefully before investing.