Stay balanced during volatile times
Invest across market cycles through SIPs and balanced advantage funds
Equity markets have witnessed intense volatility over the past few months, primarily due to rising inflation globally, geopolitical tensions and the Russia-Ukraine war. In fact, the rising inflation has forced global central banks to hike interest rates – implying an end to the easy money policy initiated by these banks after the onset of the Covid-19 pandemic – adding to the market’s woes. Equity benchmark, the Nifty 50 index, is down ~4.5% since the start of this year, leading to concern among some investor segments. Should this volatility stop investors from investing or withdraw their funds? No, instead they should continue their systematic investment plans (SIPs) and look at asset allocation through fund categories, such as balanced advantage funds.
Stay invested during market volatility
While market volatility provides an opportunity to get higher returns, it also makes investments riskier, if the investments are not optimised at the right time. The smart way of investing is to ride with the trend. During market upturns and downturns, it is important for investors to stay invested and diversify portfolios. Investing at regular intervals through SIPs helps in minimising the impact of volatility on investments and in reducing portfolio drawdowns.
Investing via SIPs is considered advantageous during periods of volatility. Investors can diversify their portfolios with both debt and equity components through SIPs. This will not only inculcate a disciplined approach to investing, but also could give potential stable returns. Some of the benefits of SIP investing during market fluctuations are:
1Data till May 31, 2022
- Ease of investing and pocket-friendly: SIP investment does not require much detailed market research and can be started with a small amount of money that can be as low as Rs 500 per month.
- Ease of investing and pocket-friendly: SIP investment does not require much detailed market and can be started with a small amount of money that can be as low as Rs 500.
Don’t stop investing during market volatility
Once an investor starts investing in SIPs, it is better to stick even when the markets decline. Staying invested for a longer time period has historically paid off. Let us take an example:
Mr A and Mr B start monthly SIPs of Rs 10,000 each in an equity fund* from September 2013. But when the market turned volatile between August 2015 and March 2016, Mr B decided to stop his SIP, even as Mr A continued.
The analysis shows that a subsequent rise in the market helped Mr A garner Rs 18.29 lakh more from his investments of Rs 750,000 (Rs 10,000 × 75 months) after Mr B discontinued his SIP.
While Mr B exited in haste, resulting in a negative return of 0.35%, Mr A continued his investment and has a positive extended internal rate of return (XIRR) of 12.3%.
Asset allocation through balanced advantage funds
Another important aspect to deal with market volatility is to allocate across asset classes, on the basis of your risk-return profile. While investments in equity funds provide market-linked returns with higher risk and can help create wealth over longer term, investments in debt funds deliver stable returns with lower risk. An easier way for investors looking at asset allocation to equity and debt mutual funds would be to invest through balanced advantage funds.
The strategy of balanced advantage funds involves allocation based on market valuations. That is, when the equity market valuations are up, the fund manager would reduce allocation in equity, and when the equity market valuations are down, allocation in debt funds will be minimised.
The below table shows that, in a bear phase, balanced advantage funds fell less than that of Nifty 50, as seen following the subprime crisis, Chinese economic slowdown, first wave of Covid-19 pandemic and the Russia-Ukraine crisis. Also, historically, during the bull phases, the category has outperformed the benchmark when the markets bounced back sharply after the subprime and Eurozone crises.
Markets largely move due to uncertainty, leading to volatility in asset prices. So, during volatile times, it is important for investors to stay invested, diversify their portfolios to benefit from market conditions and get better returns when the markets recover. While SIP investing would help investors to stay invested, investments in balanced advantage funds would help diversify portfolios. However, prior to investing in such funds, investors need to observe the track record of the fund manager and consider their own risk-return profile amongst other factors.
Disclaimer: Mutual Fund investments are subject to market risks, read all scheme related documents carefully.
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