How do you navigate market volatility with mutual funds?

Characters:

Rita (Investor)
Krishna (Financial Planner)

Scene: A cozy coffee shop where Rita and Krishna meet to discuss the recent market downturn.

Disclaimer: All characters in this article are fictitious and do not bear any resemblance to any person, living or dead.

Rita: Krishna, the stock market has been on a rollercoaster ride lately. From an all-time high of 85,478 in September 2024, it’s now down to 76,190—that’s over an 10.8% drop! I’m worried. Should I exit my mutual fund investments?

Krishna: Rita, I understand your concern. Market fluctuations can be unsettling, but it’s important to remember that equities are inherently volatile in the short term. Selling now might not be the best move.

Rita: But what if the market falls further? I don’t want to see my investments shrink any more.

Krishna: That fear is natural, but exiting during a downturn could lock in losses. History shows that markets recover over time, and staying invested allows you to benefit from that recovery.

Rita: So you’re saying I should hold on? But what about my SIPs? Should I pause them until things stabilize?

Krishna: No, Rita! Your SIPs are actually working in your favor right now. When the market is down, you buy more units at lower prices. This helps reduce your average cost and positions you for better long-term returns.

Rita: Hmm, that makes sense. But I’m still unsure about where to invest in this volatile market. Any suggestions?

Krishna: It all depends on your goals and risk tolerance. Let me break it down for you:

Short-term goals (1-3 years): Stick to fixed-income investments like short-duration debt funds / ultra-short bond funds to ensure stability and capital preservation.
Medium-term goals (3-5 years): A small equity exposure can help boost returns. Consider equity savings funds for a balanced approach or a conservative hybrid fund.
Long-term goals (5+ years): Focus on an equity-heavy portfolio. If you’re conservative or worried about volatility, aggressive hybrid funds are a great option. For experienced investors, flexi-cap funds offer good diversification, while small-cap and mid-cap funds can add higher returns, albeit with greater risk.

Rita: Okay, that gives me some clarity. I think I should review my portfolio and align it with my goals.

Krishna: Absolutely! And diversification is key. A well-balanced portfolio across market caps can help manage risks effectively.

Rita: Got it. But what about timing the market? Should I wait for a better entry point?

Krishna: Trying to time the market is a risky game. It’s nearly impossible to predict the bottom. Instead, stay focused on your long-term goals and maintain a disciplined approach.

Rita: I see what you mean. So, the moral of the story is to stay invested and stay disciplined?

Krishna: Exactly! Market downturns are temporary. By sticking to a consistent investment framework based on your time horizon, risk appetite, and asset allocation, you can build lasting wealth.

Rita: Thanks, Krishna. I feel much more confident now. I’ll stay the course and continue with my investments.

Krishna: That’s the spirit, Rita! Remember, patience is the key to financial success.

Too many cooks spoil the broth!!

Seema: Hi Kapil, I’ve been investing in mutual funds for a while now, and with all these new campaigns, I feel like I should add more funds to my portfolio. What do you think?

Kapil: Hi Seema! It’s great that you’re interested in mutual funds, but adding more funds isn’t always the best approach. Let me ask you: How many funds do you have in your portfolio right now?

Seema: Hmm, I think I have about 14. Is that too many?

Kapil: Well, it depends on your experience and portfolio size, but 14 sounds like it might be too many. Think of your portfolio like a cricket team. Imagine having 11 Best players on the field—brilliant right? Naaaah……… You will lack the balance and coordination. Similarly, having too many mutual funds can dilute your returns and make tracking your portfolio more difficult.

Seema: Oh, that’s an interesting analogy. So how many funds should I ideally have?

Kapil: For someone new to investing—lets say less than five years of experience—four to five funds are usually enough. For seasoned investors with more than five years of experience, around 8 funds is reasonable. And for those with portfolios in crores, they might need more than 10, but only if each fund offers meaningful diversification.

Seema: I see. So, how do I decide which funds to keep and which to let go?

Kapil: Start by evaluating each fund’s role in your portfolio. Here’s a simple checklist:

Give equity funds time: Hold them for at least three years before judging their performance.
Avoid sectoral and thematic funds: These are risky and often cyclical. Most investors jump in after the best phase has passed.They can be used as a satellite fund to your portfolio provided you understand that sector well
Focus on high-quality funds: Look for funds with not much expenses and consistent performance over more than 5 plus years
Eliminate insignificant funds: If a fund contributes less than 5% to your portfolio, it’s probably not making a meaningful impact.

Seema: That makes sense. So, it’s better to have fewer but high-quality funds that align with my goals?

Kapil: Exactly! A lean, purposeful portfolio is like a well-balanced cricket team—each player or fund has a role to play, ensuring maximum efficiency and peace of mind.

Seema: Thanks, Kapil! I’ll review my portfolio with this approach and start decluttering.

Kapil: Great! Let me know if you need help with the process. Investing is never about the quantity of financial products you own but the quality and alignment it serves with your own goals. Remember keeping it simple always works.

Understanding the Science behind Index Funds

Sweta: Hi Ravi, I’ve heard a lot about index funds lately. Could you help me understand what they are and if I should consider investing in them?

Ravi: Of course, Sweta! Let me explain it simply. Do you know how we have the Sensex and Nifty index that we see in daily news channel, headlines and newspapers?

Sweta: Yes, I see them all the time.

Ravi: Well, an index fund is a mutual fund that mirrors these indices. For example, if you invest in a Nifty index fund, your money gets distributed across all the 50 stocks that make up the Nifty, in the same proportion.

Sweta: That sounds straightforward. But why would I choose an index fund over a regular mutual fund?

Ravi: I Knew that you would ask about it. Well, there are several advantages to it. The biggest one is the cost factor. Since index funds are not actively managed by the fund managers, they have lower expense ratios. For instance, while an active fund might charge 0.30%, an index fund might only charge 0.15%.

Sweta: Oh, that’s a significant difference! But doesn’t that mean lower returns too?

Ravi: Not necessarily. Especially in the large-cap space, most actively managed funds struggle to beat the index consistently. The lower costs of index funds give them an advantage. Think of it this way – every rupee you don’t pay in fees is a rupee that stays invested and compounds over time.

Sweta: That makes sense. What should I look for when choosing an index fund?

Ravi: Focus on 2 main things: expense ratio and tracking error. You want the lowest possible expense ratio, and you want a fund that closely tracks its index – that’s what tracking error measures. The lower the tracking error, the better the fund is at replicating the index’s performance.

Sweta: Are there any disadvantages I should know about?

Ravi: Yes, the main one is that you’re essentially settling for average market returns. You won’t beat the market, but you won’t underperform it either. Also, since these indices are usually market-cap-weighted, they’re dominated by larger companies.

Sweta: How should I use index funds in my portfolio?

Ravi: I usually recommend using index funds for the large-cap portion of your portfolio – about let’s say 35 to 60% of your total equity investments. You can then diversify the remaining portion into actively managed small-cap, multi-cap, or sectoral funds based on your risk appetite.

Sweta: That sounds like a balanced approach. So I get the benefit of low costs for my core portfolio while still having room for potentially higher returns in other segments?

Ravi: Exactly! Index funds provide a solid foundation for your portfolio. They’re simple, predictable, and cost-effective. For your large-cap allocation, you could consider Nifty, Junior Nifty, or Sensex index funds.

Sweta: Thanks, Ravi! This really helps clarify things. I think I’ll start looking into some index funds for my portfolio.

Ravi: That’s great! Remember to check the expense ratio and tracking error when comparing funds. And as always, make sure it aligns with your overall investment goals and risk tolerance.

Navigating Market Volatility with Gold: Is It the Right Time to Invest?

It’s a common Italian proverb “Where gold speaks, every tongue is silent.” This sentiment resonates quite well among Indian households as their penchant for Gold investing never seems to die. According to a report an average Indian household has 18% of their total investment in gold. Today will discuss about what are the options available if one is thinking about investing in to the Yellow Metal”

Shreya: Hey Ravi, I’ve been thinking about diversifying my investments. What are your thoughts on investing in gold these days?

Ravi: Good question, Shreya! Actually, gold can be a solid choice, especially during uncertain times. Not long ago, sovereign gold bonds (SGBs) were my top recommendation since they offered tax-free returns at maturity, paid an extra 2.5% interest annually, and were backed by the government. But, as of recent reports, the government has halted fresh SGB launches.

Shreya: Oh, I wasn’t aware of that. So, if I can’t invest in SGBs now, what are my options?

Ravi: That leaves us with two main alternatives: Gold ETFs (exchange-traded funds) and Gold FoFs (funds of funds). I wouldn’t suggest physical gold due to issues with storage, security, and liquidity.

Shreya: Got it. Can you walk me through what Gold ETFs are?

Ravi: Sure. Gold ETFs are like mutual funds but focused solely on gold. Fund houses usually buy physical gold and then store it securely, and then list this gold on the stock exchanges as ETFs. When you buy an ETF, you’re purchasing a share in that gold without needing to hold it physically. And just like stocks, you can trade them on exchanges, which makes investing in gold very convenient.

Shreya: That makes sense. What about Gold FoFs?

Ravi: Gold FoFs invest indirectly in gold through Gold ETFs instead of holding physical gold. Since FoFs operate like regular mutual funds, they don’t require a demat account. You can invest directly through the fund house, and they even allow SIPs.

Shreya: So, Gold FoFs sound more flexible for people who don’t want to open a demat account.

Ravi: Exactly. The downside, though, is cost. Since FoFs invest in ETFs, you end up paying fees at two levels: one for the FoF management by the AMCs and another for the underlying ETFs. So, for long-term investments, the expense ratio is something to watch for.

Shreya: Okay. Between ETFs and FoFs, which one do you think is better?

Ravi: It depends. If you already have a demat account and plan to invest in gold occasionally, Gold ETFs are more cost-effective. On the other hand, if you prefer SIPs and want to invest in gold regularly without a demat account, FoFs can work well.

Shreya: That’s helpful. What other factors should I consider before deciding?

Ravi: To cut it short, there at 3 main things to be considered before investing in either of these options: Expense ratio, Liquidity, and Premium/Discount to NAV. If you are considering ETFs, look at those funds which has lower expense ratios and high liquidity, which ensures smoother trading.

Shreya: Thanks, Ravi. This is a lot clearer now! I’ll take a look at both options and choose based on my needs and the costs involved.

Ravi: Sounds like a plan, Shreya! Let me know if you need help with any specifics.

The Profit Temptation: Navigating Market Highs with a Long-Term Vision

Last Thursday afternoon, I received a call from one of my investors. His voice was a mix of excitement and uncertainty.

“I’ve made a profit of ₹20 lakhs over the past five years through my SIPs,” he said. “But now the market is soaring, and I’m thinking about booking some of those profits. I still have a long-term goal of investing for another 12 to 15 years, though. What do you think I should do?”

This is quite a common question when markets reach all-time highs. The gains are real, and the numbers in your portfolio look promising, but there’s also that lingering fear of losing it all if the market takes a nosedive tomorrow. It’s the classic struggle: Should I stay, or should I cash out?

The Psychological Dilemma: What Happens If You Sell?

I began by explaining to him the psychological games our mind plays when markets rise and our portfolios grow. Selling your investments during a market high feels like locking in your gains, but it also opens up a set of new challenges:

If you sell and the market continues to rise, you might start to regret your decision. It’s natural to feel like you’ve missed out on even bigger profits. Re-entering the market can feel daunting, as the prices are higher, and you’ll fear buying back at the wrong time.
If you sell and the market goes down, you might feel a sense of satisfaction for having timed it just right. However, this feeling can be misleading. When the market starts dropping, it’s common to wait for it to “bottom out,” but no one can predict when that bottom will come. The fear of re-entering at the wrong moment can make you stay out of the market for too long, missing the eventual recovery.

It’s important to remember that markets are unpredictable. Sometimes they soar higher after hitting new peaks, and at other times they correct sharply. Trying to guess what will happen next is risky and can often lead to emotional decisions that may not align with your long-term goals.

A Journey Through the Market’s Highs and Lows

I reminded him, “You’ve earned this ₹20 lakhs because you stayed invested through both good and bad times. Think back to the periods when the Sensex was highly volatile, dropping more than 5% in a week. Those were tough moments, but because you remained patient and kept your SIPs running, you’re now seeing these impressive gains.”

The point here is simple: staying invested has rewarded you in the past, and there’s no reason why it wouldn’t continue to do so. It’s the steady, disciplined approach that leads to long-term wealth creation. The market will always have highs and lows, but a long-term investor learns to weather those storms, not run away from them.

Managing Anxiety: Adjust, Don’t Panic

If market highs are making you anxious, there’s no need to rush into selling your investments. Instead, consider rebalancing your portfolio. Here’s what I suggested to him:

If you need cash for short-term goals, such as buying a house, funding your child’s education, or any other near-term commitments, it’s wise to move some of your gains into safer, fixed-income options like bonds or debt funds. This ensures that if the market does fall, you’ve protected the portion of your money that you’ll need soon.

If your goals are long-term, like retirement, stick to your SIPs. Equity markets are volatile in the short term, but over longer periods, they tend to smooth out. Trying to time the market perfectly is nearly impossible, and most successful investors are those who stay invested, not those who constantly try to jump in and out.

The Value of Asset Allocation

To further ease his mind, I brought up asset allocation. A well-thought-out allocation between equity, debt, and other assets (like gold or real estate) helps manage risk while keeping your portfolio aligned with your financial goals.

Here’s the beauty of it: a solid asset allocation strategy allows you to book profits periodically without the stress of making huge decisions during market highs. For example, if your equity portfolio has grown significantly due to the recent bull run, you could sell a portion and shift it into a safer asset class to rebalance your portfolio. This way, you lock in some gains but still stay invested for the long run.

Final Thoughts

I closed our conversation with this advice: “The key to successful investing is not in trying to perfectly time the markets, but in staying disciplined and sticking to your long-term plan. The market will have its ups and downs, but as long as you stay focused on your goals, you’ll continue to see your wealth grow.”

He listened carefully, then thanked me for the advice. By the end of the call, he had decided to stay the course and trust the process that had already brought him this far.

That’s the thing about investing. It’s a marathon, not a sprint. The markets will rise, and they will fall. But if you keep your eye on your long-term goals, stick to your asset allocation, and avoid being swayed by emotions, the rewards will follow.

And sometimes, the best decision you can make is to simply stay invested.

The Tale of Two Investors: Simplicity V/s. Complexity in Wealth Building

Today, let me take you through the story of two friends, Aryan and Sameer.

Both friends had inherited inherited ₹ 15 million from a long-lost relative. Both had the same goal: invest wisely and grow their wealth over the next 15 years. However, their investment journeys were poles apart, shaped by the choices they made and the advice they followed.

Chapter 1: The Advice Dilemma

Aryan, eager to make the most of this once-in-a-lifetime opportunity, turned to an online Question and Answer forum on a social media for advice. He had heard about index funds—specifically, those from a US based Investment company —and was inclined to invest in a few, sit tight, and watch his wealth grow. His goal was simple: he didn’t need the money for the next 15 years and wanted to grow it safely without much hassle.

But as Aryan scrolled through the responses, the sheer number of suggestions overwhelmed him. One set of Gurus argued passionately for buying properties, citing rental income and capital appreciation. Equity traders recommended actively managing a stock portfolio for higher returns, while hedge fund advocates touted complex strategies that promised outsized gains. And, of course, the gold enthusiasts warned of economic collapses, urging Aryan to convert his fortune into precious metals.

Sameer, on the other hand, consulted a private banker. The banker presented a glossy portfolio filled with sophisticated products: alternative investments, structured notes, and even a fund promising returns based on rare whiskey investments. It all sounded impressive, and Sameer, intrigued by the exclusivity, signed up for the services.

Chapter 2: A Matter of Simplicity

Aryan, however, found himself at a crossroads. After reading a diverse range of opinions, he attended a webinar on goal-based investing. The presenter’s message was simple but timeless: “Investments should be aligned with your financial goals, match your investment horizon, beat inflation by a reasonable margin, have the liquidity you need, and come with low costs.”

The simplicity of this approach resonated with Aryan. His goal was to grow his wealth for the long term, so a 15-year investment period made sense. He didn’t need the money now, so he could afford to invest in assets that would appreciate steadily. The advice about keeping costs low and beating inflation also clicked. Aryan chose to stick to his original plan of investing in low-cost index funds, which offered broad market exposure and minimal management fees. He saw this as the most prudent way to beat inflation over time and achieve long-term growth.

Sameer, meanwhile, was excited by the exclusivity of his investments. His private banker assured him that these unique strategies would outperform the market, offering much higher returns than the “boring” index funds Aryan had chosen.

Chapter 3: The Path of Patience vs. The Trap of Complexity

As the years rolled by, Aryan’s simple, goal-based investment strategy began to bear fruit. The low-cost funds provided steady returns, benefiting from the overall growth of the global economy. The power of compounding worked its magic. Aryan didn’t have to monitor the market obsessively or make sudden moves when the economy dipped; he trusted his 15-year horizon and his original plan.

On the other hand, Sameer’s complex investments started to unravel. The private banker had charged significant fees for managing the exclusive portfolio, eating into Sameer’s returns. Some of the exotic products didn’t perform as promised, and the volatility of hedge funds and alternative investments caused anxiety during market downturns. Sameer found himself checking his portfolio more frequently and making impulsive decisions to switch investments based on the banker’s suggestions. The costs of active management and the underperformance of several products left Sameer disillusioned.

Chapter 4: The Lesson of Simplicity

By the end of 15 years, Aryan had more than doubled his wealth, thanks to his disciplined, goal-oriented approach. His funds had not only outpaced inflation but also delivered healthy returns, all with minimal stress and effort.

Sameer, despite starting with the same amount, found that his complex portfolio had barely kept pace with inflation. The high fees, the underperformance of exotic investments, and the constant switching had eroded his gains.

Reflecting on their respective journeys, Aryan realized that the simplest approach had been the best. His initial instincts, backed by solid principles of goal-based investing, low costs, and long-term focus, had led him to success. Sameer, meanwhile, regretted falling into the trap of complexity, exclusivity, and high fees.

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Conclusion: The Fundamentals Remain the Same

Aryan’s story is a powerful reminder that the fundamentals of investing never change. Your investments should always align with your financial goals, (REFER to my earlier Blogs posted in Aug 2024) and the period should match your needs. It should beat inflation, have the liquidity you might require, and, most importantly, come at a low cost. Amid all the noise of various financial products and strategies, sometimes the simplest route—funds, patience, and discipline—is the wisest.

And so, Aryan and Sameer’s tale ends with a lesson for all investors: don’t be swayed by the allure of complexity or exclusivity. Instead, focus on the timeless principles of investing, and you’ll set yourself up for success.