Investors must only rebalance their portfolio in a volatile market

Market turbulence is often the reason why investors make premature exits from their market-linked investments. In the process, they typically deprive themselves of the advantages of regular long-term investments. More often than not, they also exit, making losses. This is especially true for investors in equities, equity funds and equity-oriented hybrid funds. So, what should a mutual fund investor do with his investments during times of turbulent markets? Here are five things to remember.       

Keep financial goals in mind: The objective of your investment is not just to generate the highest returns from some investments, but to save enough for your goals. You can do this when the mix of your investments, that is, your investment portfolio, consistently does well. Keep the big picture in mind when you are taking investment decisions in every market condition. During volatile markets, check whether the market situation is really impacting the progress towards financial goals and whether making changes will really help. If you have been investing for the last five years for your child's higher education and you need the money 10 years from now, current market turbulence will just be a storm in a tea-cup in the long run.

Be loss averse, not risk averse: During volatile markets, most investors forget that higher risk investments need not necessarily be loss-creating. This is especially so, if you stay invested for the right period of time. For instance, many studies have revealed that equity investments eight to 10 years old or more, typically provide high returns. Ironically, investors lose out the most when they make premature exits in panic, during volatile markets or sharp market downturns. So, the key is to avoid doing things that make you lose out and not be averse to higher risk investments that reward you in the long term helping you with savings for financial goals be it your child's higher education or your retirement.

Make volatility your friend: This might sound ironical to you but you can actually take advantage of volatile markets and prosper. Most retail investors typically start investing in stocks directly during a boom in the market and make a hasty exit when they see some volatility, as they do not have capacity to take losses. When you invest in MFs versus direct stocks, the scheme diversification ensures that any fall in the market gets cushioned, while the fall in individual stocks may be much higher. In addition, in Systematic Investment Plans (SIP) of MFs, you have a perfect tool that helps you take advantage of market volatility. Lesser number of units are bought when markets are high and lower number bought when markets are low. In the process, over time, your average cost of buying the units goes down, and you profit from regular investments. Many existing investors in SIPs have the tendency to stop or exit from SIPs during volatile markets. Ironically, it is the exact opposite that they need to do, that is, carry on with the SIPs.

Make correct performance evaluations: A lot of the investor nervousness and panic during volatile markets stems from incorrect conclusions drawn from news and data. The most common mistake MF investors make is not comparing their investment's performance with the scheme's benchmark and peer schemes. So, in case of an investment in a large-cap equity scheme, you need to compare the performance with the scheme's benchmark and comparable large-cap schemes. It is important to note that different MF schemes in the same category will react differently depending on their risk profile. Trust the fund manager to take care of the volatility in their segment. Making comparisons with individual investments like a particular stock or an asset class such as gold or real estate often causes unnecessary panic.

Rebalance your portfolio: If the balance in your portfolio has got tilted in favour of one asset class, correct it during your periodic review or take help of your financial advisor. It is especially important to do so in a volatile market. Investors should proactively shift their funds from asset classes which are over-weight to other asset classes which are under-weight in the portfolio.

In case you want to add new MF investments, ensure that they are aligned to your goals and the new investment will add a new aspect to your investment mix.

It might sound counter-intuitive, but it's true. During volatile markets, investors have the urge of doing something to respond to the situation. Whereas, more often than not, the best course is to simply do nothing, provided you have proactively recalibrated your portfolio.

The writer is co-CIO, Aditya Birla Sun Life AMC