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ULIP INSURANCE

Mutual Fund: Lessons For Investors in the Current Market Scenario

Joan Mathews Joan Mathews 06 November 2019

In recent months, many mutual funds have reported negative returns as a result of poor conditions in the stock market. Read this article to know the important points that MF investors should keep in mind to get through the current market situation.

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Quite a lot of mutual fund investors have raised concerns about negative returns, particularly from equity investments. Most of the questions that fund advisors have received are in the lines of - “The market is volatile and I’m losing money. Shall I put my SIP investments on hold until the market stabilizes?” or “What measures can I take to not see my portfolio go in the red?” It has been observed that many investors, during these adversities, tend to forget about their investment decisions of the past.

When money is parked in equity mutual funds, individuals are advised to remain invested and continue with their SIPs. The tenure of such investments is generally for a long period, like 5-7 years at least. If one has opted for such funds to realize a long-term goal, it is important to focus on that and not on the market’s short-term happenings. Investors must remember that equities are a volatile asset class, and there will be instances when the portfolio’s value can be below what was invested. If investors can get themselves to weather it out, they may be rewarded with good returns after some years.

The debt mutual fund space was badly affected by the IL&FS fiasco and a series of defaults and downgrades. One of the key learnings, for both investors and fund houses, has been around the credit opinion that is built relying on external agencies. The IL&FS blowout has highlighted the need for prudent regulatory regime to monitor large institutions and prevent any recurrence. Investors need to keep in mind that debt mutual funds are not risk-free. They are subject to liquidity risk, interest rate risk and credit risk. Individuals are advised not to park money in funds with a high exposure to businesses having a large leverage. Higher the fund’s maturity profile, the more prone it will be to interest rate risk.

Guide to Investing in Mutual Funds

Individuals who are looking to invest in mutual funds for the first time should first consult with a fund advisor on the best schemes to park money in. The advisor will provide guidance on how users must choose mutual funds as per their financial goals and risk profiles. Mutual fund investments come with varying degrees of risk. Equity funds carry the highest risk, while people with low-risk appetite are advised to consider money market funds, liquid funds or debt mutual funds. Those who would like to divide their investments between equity and debt can opt for balanced funds, which carry moderate risk.

Now, here’s a quick glance at some of the important factors that first-time investors should keep in mind before putting their money into best mutual funds to invest:

  • Investment Objective: An individual should first start by assessing his or her investment objective. If the intent is to earn capital gains for more than a year, then it is recommended to go for a long-term mutual fund scheme. On the other hand, if the objective is to earn regular income, then the individual must go for short-term schemes.
  • Performance Consistency: Knowing how the scheme has performed over the long term is another important factor that must be taken into consideration. Rather than finding out how much returns the scheme has recently generated, it helps to base the investment decision on how the fund has performed in the past three to five years.
  • Experience of Fund Manager: It is essential to know the years of experience of a fund manager. One must look into whether the fund manager has handled the fund during its best and worst periods. In case it is a new fund manager, one can track his or her previous record with other funds of the same AMC or a different one.

Conclusion

Prior to investing in mutual funds, individuals are first advised to consult with financial experts and fund advisors. They will advise on the best-suited fund, after matching it with their risk profile and financial objectives. Considering that there are hundreds of schemes within every category, it is important to select those that have performed consistently well for at least 5 years. Also, it is important to not forget factors like fund manager’s credentials, portfolio components and assets under management. Taking all of these into account will help individuals make an informed decision on the schemes they avail.

Recommended Read: Did You Invest in the Best Performing Mutual Fund NFO?

Joan Mathews
Written by Joan Mathews
Joan has over 4 years of experience writing for the BFSI industry. She enjoys watching mystery TV series, listening to 80s classics and spending time with her furbabies.