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These are uncertain times for the capital markets. The current situation caused by the coronavirus pandemic is unprecedented, and we don't know how healthy our investments are. It is natural for us to look for ways to safeguard our financial health. Global markets are witnessing a fall in the value of instruments across the board. We do not know how fast or how the markets will recover from the blow. This uncertainty includes investments in mutual funds.
In such times, it is best to relook at the fundamentals of the market and rely on them. Instead of speculative investments, we need to make smarter and well-thought choices depending on our financial needs and expectations. Taking a conservative investment approach is advisable, and you should only make investments in mutual funds according to your risk appetite.
Here are a few tips on how to navigate the market during the lockdown and make investments in mutual funds.
Check the Quality of Your Investments
This is a good time to examine your mutual fund portfolio. Not every mutual fund in your portfolio would be of high quality. You may have decided to make investments in mutual funds that are newer and unproven. Times of crisis is a good litmus test that separates the poor investments in mutual funds from the high-quality ones. If some of the mutual funds you have invested in have taken a sharper than usual fall, then you may want to rethink your investment. You should consult a financial adviser or a wealth coach on how to make investments in mutual funds. They will be able to guide you through the process of making the necessary adjustments to your investments in mutual funds. They can pick which investments will stand the test of time and which should be sold in the near term. They will also help you align your portfolio to your financial goals and risk appetite.
Do not panic and start selling. Due to the uncertainty in the market, stock prices are volatile. You will be selling your holdings at an inferior price because shares are undervalued in the current situation. While you should be re-evaluating your portfolio, this does not mean you should sell all investments in mutual funds.
The market will pick up again, and the value of your holdings will be much more than it is today. Therefore, it may be more advisable to keep investing in mutual funds. If you have a regular income, then there is no reason for you to stop investing.
This is a time when you can purchase high-quality stocks and mutual fund units at a fraction of their true value. While you should keep investing, you should invest in quality mutual funds only.
Due to increasing levels of credit risk in the Indian market, it may be advisable to stay away from debt mutual funds at the moment. Your investments in mutual funds should consist of equity funds.
Consider looking at the international markets as well. Investments in mutual funds that hold shares in global equities may be beneficial in troubled times. Mutual funds that hold foreign equity will significantly diversify your portfolio.
Under-performance in the Indian markets does not always equate to under-performance in the global markets. You can benefit from the rise in stock prices of global leaders like Amazon and Apple. You have the option of making investments in mutual funds that hold such stocks. This will also protect you from unwanted fluctuations in the value of the Indian rupee. You can consider it a hedge against the fall in its value.
While making investments in mutual funds, it is always good to think long-term. Even though the market may be uncertain in the near future, there is a high chance that the Indian capital markets will witness sustained periods of growth. While thinking long-term, your investments can help you reach the primary financial goals of your life, such as buying a home or a second home, your children's higher education, and your retirement fund. You should consider value investments in mutual funds rather than speculative investments in these times. While value investing, identify mutual funds that share your values and which you feel can provide the right amount of gains in the long term. Ensure that the risk profile of these mutual funds suits your risk appetite.
While your primary goal should be thinking of your long-term needs, you can also make investments in mutual funds that are better suited to help you with your short-term goals. By short-term goals, we mean goals that you want to fulfil within the next three years, like renovating your home, renting office space, buying a new car, and so on.
Several mutual funds are geared towards providing short-term value. These mutual funds do not invest in the equity market. For short-term needs, it is never advisable to make investments in mutual funds that invest in equity since they typically take a much longer time to deliver value.
While investments in mutual funds are essential, you should also set aside money for emergencies. Having an emergency fund alongside your investments in mutual funds grants you a lot of peace of mind. This fund should be enough to take care of any medical or family emergencies that may arise. The size of your emergency fund should be enough to cover six months of living expenses.
Do not use your emergency fund for any purpose other than actual emergencies. These funds are not to be used for any kind of unforeseen expenditure. Having a separate emergency fund will help you have a better appetite for risk while making investments in mutual funds.
Investment mode - While you are locked down in your homes you can still keep investing or make a fresh invest in a mutual fund scheme of your choice using the online channels. You can login into the online portal of the fund house of your choice or your bank account to access the investment section. Once there you can select the fund of your choice, select whether you wish to make a lumpsum investment or start a SIP. Select the SIP frequency, add the mutual fund house in your biller section to ensure that the SIP gets deducted as per your set frequency and voila you are done.
Final Thoughts - Even though it may seem like an unwarranted risk in these troubled times, you should not hold back from continuing to make investments in mutual funds if you have sufficient monetary strength. You can purchase mutual fund units at undervalued prices during such times, which can help you meet your financial goals in the short-term as well as long-term. However, be wary of how you make investments in mutual funds and seek professional help to shape your portfolio.