The world, and by extension the stock market, has been very uncertain over the last few years. First with the pandemic, now with geopolitical unrest. So, if you, like many other investors, are worried about your equity mutual funds, here is what you need to do.
Remember your investment horizon
When you have invested in equity mutual funds, chances are your investment horizon is between five to 10 years. This is because equity mutual funds require a long investment horizon to hedge short-term market volatility and give returns of 12 to 15 percent. When the markets are down and ending the week in the red, it might be natural to get anxious or think that you are losing money. But it is essential to remember that you only lose or gain money when you actually sell your mutual fund units and that this short-term volatility is a part and parcel of equity investments. Like the markets always have, they will recover in the long term.
Hence, another thing to note when it comes to equity mutual fund investments is that you should sell your funds when you are nearing your goals. For instance, if you had a 10-year goal to save for the down payment of your first home, by the eighth year or so, you should start withdrawing your money from equity funds and allocating it to safer instruments. You could invest that money in other types of mutual funds such as debt funds. This is because the closer you are to your financial goals, the less risk appetite you have since your equity funds do not have enough time to recover if markets take a hit. This ensures that you don’t have to sell your investments at a loss for when you need to access your money.
Reconsider your asset allocation
Look at your current investment portfolio. Does it only have equity funds and other equity investments? If that’s the case, then you will have to work on your asset allocation because diversification is the key to hedging market risks. Other asset classes such as debt or fixed-income securities like bonds, gold, etc., are not impacted by the same things that affect stocks. Hence, during times of market volatility, these instruments are considered safe-haven assets. You should ensure that your investment portfolio always has some percentage of debt instruments. Within the equity mutual funds category also, you can consider diversifying by investing in international funds. Investing in markets of other countries could also help as they may not move in tandem with the domestic market.
The proportion of equity and debt in your portfolio will usually depend on your risk tolerance. The more risk you can take, the higher should be the equity proportion. However, during times of uncertainty, when you are worried about your equity mutual funds, your asset allocation may have to be different than usual as your risk tolerance may change. This is also why it is advisable to rebalance your portfolio once a year.
If you have always been an active investor and have sufficient knowledge of the market, you may be able to make such decisions yourself. However, if not, you can also consider consulting a financial advisor who can help you with what moves you should make next – changing asset allocation, picking certain kinds of equity funds over the others, etc.