Things to keep in mind when the fund performance is disappointing

Mutual fund investors are facing hard times with the dismal performance of both equity and debt-oriented funds recently. On one hand, the equity market meltdown in 2022 following Russia-Ukraine war, rising inflation and interest rate hikes is impacting the equity funds while on the other hand gradual increase in interest rates is hitting the debt funds.  This rare double whammy is making investors nervous and restless. Majority of them are wondering whether they will be able to reach their financial goals? What if they lose large sum of invested capital?

All these worries and confusions are quite natural and the urge to act is even more urgent. But this is not the time to take hasty investment decisions risking your hard-earned money and losing out an opportunity to create more wealth in future. Instead stay calm, disciplined and take prudent actions. To do so we list down some of the key aspects’ investors should keep a note of in current uncertain scenario:

Understand the reasons behind the why the mutual fund schemes offering negative or discouraging returns?   

As an investor you might have selected mutual fund schemes in line with risk appetite, goals and investment horizon and obviously expect them to perform well. But wait mutual funds are market linked avenues. The fluctuations in the underlying asset classes impact the performance of the funds.   

Two key aspects to understand:  Is negative returns owing to markets not doing well or is it due to fund specific factors?  

In the current times lot of funds may not be doing well due to volatility across different market segments. Next check if there is anything wrong with the fund like for instance fund has underperformed benchmark and category by wide margins and over prolonged periods. Investors can do these checks on their own or seek help of financial advisor and accordingly take investment decisions.

Know the nature of the asset classes

By nature, equity is highly volatile in short run and can be rewarding in long run i.e., five to seven years. Hence, same gets reflected in equity fund performance as well. Similarly, not all debt funds will perform badly in rising interest rate scenario. 

Investors can tweak their debt portfolio and consider in those debt fund categories which benefit from the interest rate rise.  For more details see our previous article https://www.synconly.com/navigate-interest-rate-hikes-with-investment-in-these-debt-mutual-funds 

Once the investors gauge the nature of asset classes, they may find easy to understand different mutual fund categories and can invest across different mutual fund categories with changing market conditions.

Keep emotions in check

Investors feel ecstatic when the market rise and feel miserable when market fall.  Given the cyclical nature of the financial markets, investors experience wide range of emotions of greed, fear, euphoria, panic etc across different market phases. While one may think that such emotions are experienced only with those investing directly in equities or debt.  But in today’s time when so much of information is floating in the media even mutual fund investors feel several such emotions.

To overcome such emotional biases, first avoid frequent checking of the portfolio. Don’t assume that all the rumours or negative news headlines are true. Calm down, divert attention to other areas and hold on the investment for the long term.  

Asset allocation is vital and don’t stop the systematic investment plans

Asset allocation helps to optimise returns and reduce risk by diversifying money across different asset classes.  Mutual funds investors can get the benefits of asset allocation by investing across different mutual funds categories.  In volatile times, H=hybrid funds such as balance advantage funds or aggressive hybrid funds provides hassle free rebalancing by investing across equity (growth) and debt (stability).

Asset allocation should be done in line with goals, investment horizon, risk appetite, market and fund performance.

Next, don’t stop the SIP yes if the fund is not performing well then investor can switch the SIP to other good performing funds or else as market gradually rises investor will be left out.  Performance of the equity funds should be reviewed over long period of time and not less than year. During last several months when market is highly volatile, a systematic investment plan (SIP) in equity funds would have fetch more units on every instalment and eventually when market will move up more units can help to capture more gains. 

Avoid panic selling and instead sell only when the goals are achieved

Investment in mutual funds should be governed by goals and not market movements. Investors put money in equity funds for long term goals of five, ten or fifteen years like for instance buying a house, fund child’s education and they might invest in debt funds for short term goals ranging for few months or for a year like paying utility bills. If the goal is near then investors can redeem their investments. 

Investors can use systematic transfer plan (STP) to transfer money from equity to debt fund especially when they can’t withstand volatility. They can also withdraw in parts through systematic withdrawal plan (SWP) instead of selling all the investments at one go. Selling out of fear, booking profits won’t make any sense as market always recovers and rises in the long term.

Summing up

Just like life is not a straight line and its zig zag wherein the ups and downs are part of it and we keep a faith that everything will be fine in the long run. So is the case with your investments. Be calm and don’t get carried away during market swings and be guided by the goals.