Staying invested may not be the best option if you have chosen wrong funds or poor script
If you were to take a look at the performance report of the mutual fund industry, you won't find too many impressive performers in the last couple of quarters. While the stock market in general has lost over 30-35 percent in the last two quarters, the scenario is even more ghastly in the case of mutual funds. Many aggressive funds have lost as much as 40 percent and most new funds are sitting on a loss of nearly 50 percent. The current scenario is bound to make the investor worry.
For those who made an entry into equity a few years, ago, the current scene is bound to be more painful as they are faced with negative returns for the first time. The uninterrupted Bull Run from 2004-08 had made many forget the realities of risk associated with equity. In fact, many dabbled in mutual funds too like stocks. Some even thought that with mutual funds, there was no risk as the fund manager was expected to manage returns.
If investors equated mutual funds with stocks, you can't blame them because some of the fund managers too functioned like individual investors. In many cases, fund managers chose to bet on stocks which had price earning ratios of 60-80 and property ownership was the key driver for stock-picking rather than core business. Needless to say, some of these aggressive funds have begun to settle at the bottom of the table. The current market scenario is an eye opener for investors. To start with, mutual funds need to be looked at from a long-term perspective and investors need to go for a careful combination of different themes and sectors. For instance, while sector funds can be out performers in a bull market, they carry their own baggage of risks. As a result, you need to go in for the right mix while choosing funds. Even if you opt for sector funds, the exit has to be an integral part of the strategy, as these funds suffer from cyclical underperformance. Ideally, you need to look for a contrarians view with respect to sector funds as this strategy can pay handsome gains.
Besides having the right mix of themes, investors also need to focus on the past performance and the ability of funds to cut down their losses in a volatile market. Unfortunately, here, not too many funds have a track record of over five years, which means most funds have not been tested in a weak market. While that definitely makes the task of choosing the fund tough for investors, you can combat this factor through your own strategies. For instance, you need to look at the option of lump sum and the SIP route for wealth creation. Investors should acquire the habit of profit booking. While the long-term investment strategy pays, it is also important for investors to keep an eye on their goals and cash flow needs. For instance, an investment made for the specific expenses like education needs a close monitoring and you need to book profits from equity funds and transfer them to capital-protected or debt funds to fund the expenditure, closer to the event. Or else, a spike in the market can change the value of the portfolio and defeat the very purpose of the investment.
One of the options would be to fix a target for the corpus in terms of amount or in terms of returns, and you can use products like systematic withdrawals or systematic transfer funds. These would ensure better management of profits and take care of expenditure funding too.
If you were to take a look at the performance report of the mutual fund industry, you won't find too many impressive performers in the last couple of quarters. While the stock market in general has lost over 30-35 percent in the last two quarters, the scenario is even more ghastly in the case of mutual funds. Many aggressive funds have lost as much as 40 percent and most new funds are sitting on a loss of nearly 50 percent. The current scenario is bound to make the investor worry.
For those who made an entry into equity a few years, ago, the current scene is bound to be more painful as they are faced with negative returns for the first time. The uninterrupted Bull Run from 2004-08 had made many forget the realities of risk associated with equity. In fact, many dabbled in mutual funds too like stocks. Some even thought that with mutual funds, there was no risk as the fund manager was expected to manage returns.
If investors equated mutual funds with stocks, you can't blame them because some of the fund managers too functioned like individual investors. In many cases, fund managers chose to bet on stocks which had price earning ratios of 60-80 and property ownership was the key driver for stock-picking rather than core business. Needless to say, some of these aggressive funds have begun to settle at the bottom of the table. The current market scenario is an eye opener for investors. To start with, mutual funds need to be looked at from a long-term perspective and investors need to go for a careful combination of different themes and sectors. For instance, while sector funds can be out performers in a bull market, they carry their own baggage of risks. As a result, you need to go in for the right mix while choosing funds. Even if you opt for sector funds, the exit has to be an integral part of the strategy, as these funds suffer from cyclical underperformance. Ideally, you need to look for a contrarians view with respect to sector funds as this strategy can pay handsome gains.
Besides having the right mix of themes, investors also need to focus on the past performance and the ability of funds to cut down their losses in a volatile market. Unfortunately, here, not too many funds have a track record of over five years, which means most funds have not been tested in a weak market. While that definitely makes the task of choosing the fund tough for investors, you can combat this factor through your own strategies. For instance, you need to look at the option of lump sum and the SIP route for wealth creation. Investors should acquire the habit of profit booking. While the long-term investment strategy pays, it is also important for investors to keep an eye on their goals and cash flow needs. For instance, an investment made for the specific expenses like education needs a close monitoring and you need to book profits from equity funds and transfer them to capital-protected or debt funds to fund the expenditure, closer to the event. Or else, a spike in the market can change the value of the portfolio and defeat the very purpose of the investment.
One of the options would be to fix a target for the corpus in terms of amount or in terms of returns, and you can use products like systematic withdrawals or systematic transfer funds. These would ensure better management of profits and take care of expenditure funding too.
