Downward trends in a market can be prompted by several events. A significant financial event in another market or country, game-changing regulatory changes etc, to name a few. A global pandemic like what we see today with no clear visible end, can push the market into a consistent downward spiral, which has the tendency to put investors into a panic frenzy. Emotional thinking tends to take over rational thinking at such a time, sometimes leading investors to take avoidable investment mistakes.
Having witnessed a significant dip in the markets – almost 25%* since the all-time high at the start of this year, you may begin feeling butterflies in your stomach with regards to safety of your mutual fund investments. But before you jump to take any big steps, consider these common mistakes made by mutual fund investors during a market downturn which you could avoid:
*Source: Bseindia.com. 16th Jan’20 All-time high of BSE Sensex – 42,063 points compared to 3rd May’20 closing – 31,715
1. Focussing on short term losses and mindless liquidation of your portfolio
Its natural to fear losses. This can push you towards focusing only on short term losses incurred by your portfolio and liquidating your investments just out of fear of incurring more losses.
Stock market falls can often be significantly prompted by overall market and investor sentiment. You should assess the asset allocation and investment strategy of funds in your portfolio. Especially for funds that have managed to beat the market even in a falling market i.e.: whose NAVs have fallen but at a lower % than the fall across the market, it may be wise to stay invested. This is a better strategy rather than mindlessly liquidating your portfolio only because it has lost some of its value in the market downturn. The key to remember here is long term investing - what you might lose on paper today you can gain back in the future when markets recover.
Switching from an overall long-term strategy to a short-term strategy only on the basis of short-term losses incurred, without evaluating other market factors is not prudent.
2. Trying to time the market to buy mutual fund units
The flipside of the above is buying mutual fund units merely because their prices have fallen, without a thorough analysis. Choosing a mutual fund investment should be based on analysis of several parameters including investment strategy, past performance, fund manager expertise etc. Stick to this strategy instead of trying to time the market to catch units at what you think would be their rock bottom NAVs. For example – do not jump to invest in a fund merely because it has lost significant value which you think it should recover – study its investment strategy to see whether it has lost value due to an undervaluation or due to a non-viable investment strategy.
3. Switching your portfolio from equity to debt
Due to the fear of short-term volatility in the market, you may find yourself wanting to switch out of equity, seeking a safety net in debt-based instruments. This may not be the best decision considering that over the long run it is equity-based investments that tend to give reasonably better returns. You could re-assess your risk appetite in a market downturn, but you should maintain your overall portfolio allocation between equity funds and debt funds as per your risk profile.
4. Pausing or stopping your SIP investments
Investors have a tendency to fear the market during a downturn. This often not only keeps them from venturing into the market but can also prompt existing investors to pause or stop their ongoing SIPs.
The success of SIP investments hinge on consistency in investing. Leveraging on the benefit of rupee cost averaging is not possible if investing is stopped in falling markets out of fear of losing money. This in fact could be the time to take advantage of market fall to obtain more units through mutual funds SIP which can yield reasonably good returns when the markets begin to recover.
The crux of your strategy in a falling market should be to evaluate your investing / redemption decisions carefully after thorough analysis of the investment strategy, fund performance and asset allocation of your mutual funds. Avoid falling in line with herd mentality and taking emotionally driven decisions based on what you perceive of the market sentiment around you.
Mutual Fund investments are subject to market risks, read all scheme related documents carefully.