Worried about mutual fund losses? Expert shares 5 ways to reduce portfolio risk and navigate equity market volatility
Over the last 1 year, due to geopolitical tensions and the ongoing US-Iran dispute, which have driven elevated oil and gas prices, along with a host of other factors, the benchmark Nifty 50 index in India has delivered a negative return of -3.34%. On similar lines, the BSE Sensex has delivered a negative return of -3.95%. This has also resulted in several mutual funds in the small-, mid-, and large-cap categories not performing in line with expectations.
This data also shows that all investments in equity markets are subject to market volatility, making proper understanding of these asset classes and risk management an important part of long-term wealth creation.
It is a given that market fluctuations cannot be completely eliminated; investors can still protect their portfolios from excessive risk by following several fundamental rules of investing, such as proper asset allocation as per their risk tolerance capacity, meaningful diversification and disciplined investing.
Tushar Gupta, Business Head – Mutual Funds, Paisabazaar, explained how investors can manage risks in their mutual fund portfolios, stating, "You can effectively manage risk in your mutual fund investments by following a few disciplined practices. First, allocate assets as per your goals, investment horizon and risk appetite. Second, instead of chasing recent returns, diversify across asset classes and sectors to avoid excessive exposure to any single theme or industry.”
He further added, “Third, stop reacting to short-term market movements. Fourth, continue Systematic Investment Plans (SIPs) during market volatility to benefit from rupee-cost averaging. Fifth, review fund performance and portfolio overlap periodically to ensure investments remain aligned with changing financial goals and risk tolerance. Lastly, rebalance the portfolio whenever the asset allocation drifts significantly from the desired mix."
With the important points discussed above in mind, let us now explore several effective ways to reduce overall risk in an individual investor's mutual fund portfolio to facilitate prudent wealth creation.
Based on Gupta's observations, investors should focus on these five practices:
1. Choose asset allocation carefully: Make sure that you distribute your investments properly across equity, debt, fixed deposits and other similar asset classes in accordance with your financial objectives, risk-taking potential, current financial reality and investment horizon. If needed, do not hesitate to seek help from a financial advisor.
2. Diversify your investments: Do not expose your overall portfolio to a single stock, mutual fund, or a specific sector, industry or investment theme. Strategic diversification can help an individual reduce the risk of portfolio concentration.
3. Avoid panic during market volatility: Investment decisions should be made after proper due diligence and consideration of all pros and cons. They should not be made based on emotions. Hence, do not exit funds merely because of short-term market corrections. Always keep your long-term financial objectives in mind.
4. Continue SIPs during market fluctuations: Even when the market is underperforming, or continues to trade sideways for extended periods of time, ensure that you continue with your SIPs in mutual funds, so that you can benefit from rupee-cost averaging by purchasing more units when prices are lower.
5. Review and rebalance your portfolio: Finally, do check and review your overall portfolio consistently. Go through your fund performance, portfolio overlap and asset allocation. Make sure that you rebalance investments as your age, financial targets, and family responsibilities change.
In summary, mutual fund risk is not just about eliminating market volatility completely, but about understanding the asset class at a fundamental level and ensuring that your investment can consistently withstand market fluctuations.
Furthermore, a diversified portfolio, consistent mutual fund SIPs, and periodic reviews of one’s investment portfolio can help investors navigate volatility without losing sight og their financial objectives. Eventually, discipline, clarity of mind, and a long-term perspective matter way more in investing than chasing short-term emotion-driven returns.
Shivam writes on personal finance, equity markets, and mutual funds. He has previously contributed to several leading publications, including Moneycontrol. He can be reached at shivam.shukla@htdigital.in
Get Latest real-time updates
Catch all the Instant Personal Loan, Business Loan, Business News, Money news, Breaking News Events and Latest News Updates on Live Mint. Download The Mint News App to get Daily Market Updates.
HomeMoneyPersonal FinanceWorried about mutual fund losses? Expert shares 5 ways to reduce portfolio risk and navigate equity market volatility
✕
Wait for it…
Oops! Looks like you have exceeded the limit to bookmark the image. Remove some to bookmark this image.