Ways to Protect your Mutual Fund Portfolio from Stock Market Crash
Stock markets are down by over 10,000 points, i.e. 25% in the last 10 days. If you are mutual fund investor, you would have seen erosion of the NAV of the funds in which you have invested. The reason could be corona virus or fall in crude oil prices and 100 other reasons. Is it really possible for mutual fund investors to protect their mutual fund investors? The answer is Yes and No. This would depend on how you view them. In this article, I would provide various ways to protect your mutual fund portfolio from stock market corrections or stock market crash.
Why Stock Markets are taking correction?
One should understand why stock markets are taking correction to understand whether this is short term fall or global market fall.
1) Corona virus – This is creating panic across the world. A couple of days back WHO has declared the virus outbreak a pandemic, which means it is a global issue affecting most of the countries.
2) Ban on Travel: With WHO indicating it as a global pandemic, many countries has cancelled all visas and put travel ban. Means one cannot travel from one country to another. In India, all visas are cancelled now.
3) Foreign investors, sell-off: In this current situation, foreign investors who invested in Indian stock markets started pulling off money now as there is global fear.
4) Yes Bank Crisis: RBI has issued moratorium on Yes Bank and restricted its transactions. It restricted cash withdrawals per account holder. This is adding fuel to the fire. There are several mutual fund schemes that invested in Yes Bank debt papers which are affected now.
5) Fall in Crude Oil Prices: In the last few days, fall in crude oil prices also hit the sentiment of the stock markets.
6) International Markets down: All global markets are reacting negative to all these instances. If you have invested in some of the international mutual fund schemes, you would see that your NAV would have gone down.
6 Ways to Protect your Mutual Fund Portfolio from Stock Market Crash
Here are a few thoughts:
1) Adopt Goal wise Strategy rather than returns strategy
I keep commenting on various articles. While one would look at returns in the mutual fund scheme, one should invest based on the goal of your investment. The goal can be determined by the corpus that needs to be accumulated + tenure of investments.
If you say, I want to accumulate Rs 1 Crore by investing X amount in the next X years. This is really good way of tracking. If stock markets are down now, who cares? Focus on top performing mutual fund schemes and continue your investments through SIP.
2) Diversify your portfolio
Are you investing in diversified mutual fund portfolio? If you observe, we keep recommending top 10 mutual funds every year, which contains largecap, midcap, smallcap, diversified and balanced funds. This would work like a diversified mutual fund portfolio and can reduce the stock market crash to some extent.
3) Invest in balanced mutual funds
Balanced mutual funds invests 65% of its portfolio in equity and upto 35% in debt instruments. If there is a huge stock market crash, the decline in returns from such mutual funds is low compared to other equity mutual fund schemes.
4) Invest in lump sum in mutual funds
Every correction is an opportunity for investors. However, do you know the bottom of the such correction? No one. Since we have seen over 20% correction now, it is good to pump more investments now through lumpsum now. However, one should not invest emergency funds or money in which you are generating regular fixed income to bear your regular expenses. Such decisions can kill your motto.
5) Rebalance your portfolio now
If you have made mistakes in buying wrong mutual fund schemes, you should rebalance your portfolio now during correction. Here are some wrong decisions in mutual fund schemes.
Low risk investors buying midcap mutual funds that are high risk. Avoid them.
Investing only in midcap funds or top performing small cap funds where the portfolio would be at high risk. You should diversify your portfolio.
Investing in long term funds, but your goal is for short term goals like expenses for child education or paying for a car loan or home loan down payment, etc., Stick to short term mutual funds if your goal is just 1 year.
Investing in long term funds where your goal is just 5 years. In such case, pick-up some of the Best SIP plans for 5 years purpose.
6) Invest in sector funds that are evergreen
One of the best ways to beat such stock market corrections is to invest in stocks or sector mutual funds that are evergreen. Banking mutual funds and FMCG mutual funds are always referred as evergreen mutual funds. If you are investing in such funds, continue them. If there is dip in this stock market crash, one can consider these funds which would recover at a faster pace than blue chip mutual funds or other equity funds.
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Ways to Protect your Mutual Fund Portfolio from Stock Market Crash
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Thanks Sir for this article. Your insights are invaluable and well received. Do you have any suggestions of mutual funds where i can invest lumpsum during this downtime?
Eugene, This depends on your risk appetite. If you can take some risk, you can invest in balanced funds now. Since markets have fallen by 30% from peak levels, still mutual funds are available at lower NAV. If you do not want to take risk, I would advice you to simply invest in liquid funds. Debt funds have become risky (which you would have seen from Franklin India 6 debt funds wind-up story).
Hi, in this market scenario I was planning to continue sip (Rs. 1000 in each fund) by revisiting portfolio and considered the following plans for a 15years goal.
1. Axis bluechip fund
2. Mirae Asset emerging bluechip find
3. SBI small cap fund
4. SBI gold fund
5. Motilal Oswal NASDAQ fund
6. SBI gold fund
Please comment whether I should go according to this list or should change anything.
Good funds except for point no.4 and 6. Instead of gold funds, I would personally like to invest in Sovereign gold bonds (though it has lock-in period) and I would get interest every year + can accumulate gold value for either daughter marriage or future utilization of gold
Good evening KP Sir..I am writing after long time..I am high risk taker & investing in these funds from last 2 years, my investment period is 20 years.
1.DSP BlackRock Small cap Fund-12.5%
2. Franklin India Smaller Companies fund-20%
3. ICICI Prudential Equity & Debt fund-12.5%
4. Mirage Assset Emerging Bluechip Fund-30%
5.Princing Emerging Bluechip Fund-25%
Please review my funds, whether to continue or any portfolio balancing is required?
Hello Bir, Good to hear from you after long time. Since you are high risk taker, smallcap / midcap funds in your portfolio are good to continue. You have 1 hybrid fund too which is for moderate risk takers, but it can help you to diversify your portfolio
Any recommendation of funds for LUMSUM
Would recommend in next few days Shriram.