In the past two years approximately, equity fund investors have experienced a roller coaster of emotions because the equity market moved from multi-year lows in March 2020, to all-time high within the half-moon of 2021 sailing the emotions from extreme fear to euphoria. Equity market and emotions go hand in hand. However, reacting to the market fluctuations can make it difficult for investors to think about their financial goals. Say, during the downturns it’ll be dreadful to work upon the price of the hard-earned money eroding. And, if one opts to redeem the investment will lead to transferring notional loss into actual loss.
One must do their own research before investing. Know what you own, and know why you own it. Make informed decisions. If one doesn’t feel confident about financial planning, it would be better to hunt for professional help. Many often tempt others to follow the investment form of a well-known investor who is tasting success. However, their investment strategy may not align with their risk profile or financial goals.
A common mistake that investors make is to treat equity mutual funds like stocks. Even though equity mutual funds are market-linked and returns are not guaranteed, it must not be a cause of worry if the investor has a long term investment horizon. The impact of volatility on the mutual fund returns negates over a period of time and one gets the opportunity to earn handsome returns in the long run. Therefore, one must avoid investing in equity mutual funds for an investment horizon of less than 3 years.
Investing in mutual funds via SIP makes timing the market irrelevant, as one buys less units via SIP when the market is on an upward trend and buys more units when there is a market downturn which averages out the cost of investment. A well-diversified portfolio of mutual funds helps to lower the risk and ensures peace of mind. By diversifying investments or allocating assets across categories will save from the hassle of constantly churning the portfolio in line with the dynamic market conditions.
Equity mutual fund investments are susceptible to the market. Rebalancing asset allocation will assure whether the portfolio is on the right track to achieve set goals. It will also help to find out if there is a need to make changes in the portfolio like replacing consistently underperformed funds. Reacting to market behavior can lead to unnecessary stress and cause you to deviate from your goals. Instead one must focus on building a strong portfolio on both up and downside conditions.
One should opt for the Core & Satellite approach to investing, that will help ensure balancing risks and returns at the same time. The ‘Core’ holding should comprise around 65-70% of the equity mutual fund portfolio and consist of a Large-cap Fund, Flexi-cap Fund, and Value Fund/Contra Fund. The ‘Satellite’ holdings of the portfolio can be around 30-35% comprising a Mid-Cap Fund and an Aggressive Hybrid Fund.