Ways you can protect your mutual fund portfolio during the downturn

As an investor, you face a certain level of risk associated with your investment portfolio, regardless of how much you wish to control and forecast future occurrences. Notably, there have been occasions when unexpected circumstances such as natural disasters, economic collapses, pandemics, and wars changed critical factors such as a country’s economy, political measures, and market attitude.

These changes affect an investor’s portfolio’s performance in one way or another, creating downside risk. By far the most significant trigger event of our time, the COVID-19 pandemic resulted in public health crises, economic collapses, job and business losses, and financial difficulties for many investors, who saw their investment portfolios underperform due to extreme market volatility.

While you cannot foretell the future or control all of the factors that contribute to the development of a crisis, you can make prudent choices to ensure your preparedness. This will aid you in avoiding and mitigating losses in your portfolio that may have occurred due to an unforeseen crisis. Being prepared and diversifying your assets are two essential components of a robust defensive strategy that can assist you in weathering a financial downturn. Let’s take a look at how you can protect your mutual fund portfolio during crises:

Align your financial goals with your investments

You can begin by performing a broad examination of your whole investment portfolio and then examine each asset in detail after accounting for its particular objective. While equities mutual funds are long-term investment vehicles, you may not be concerned enough by short-term volatility to redeem or terminate your investment in equity mutual funds.

Specific mutual fund schemes may be long-term in nature with the goal of capital appreciation, while others may be short-term in nature to save for a child’s education or a foreign trip. Before investing in any mutual fund scheme, you must assess the level of risk you are comfortable with considering your age, income, dependents, and financial ambitions.

When selecting mutual fund investment schemes, consider your investment style, whether aggressive or conservative and select both equities and debt funds based on their quantitative and qualitative characteristics. It’s critical to remember that each investment should have a purpose that aligns with your financial goals, risk tolerance, and time horizon.

Conduct a reassessment of your asset allocation plan

Re-evaluate your asset allocation strategy throughout the process. Due to market fluctuations, the total asset allocation of your portfolio based on your risk tolerance may stray over time. Additionally, historical data indicates that no two asset classes consistently perform in the same direction. Hence, your portfolio should be diversified among asset classes such as stock, debt, gold, and cash to create higher risk-adjusted returns.

Certain mutual funds may outperform others, resulting in an excessively aggressive or conservative portfolio. To minimise potential risk, rebalancing the portfolio with a few modifications is a good idea. For instance, if your portfolio is heavily weighted toward long-term equity funds, you may wish to balance it with debt securities and liquid and short-term assets to provide stability and steady growth in the face of unpredictable markets and unforeseen emergencies.

Increase your diversification

Diversification is the most necessary precaution you can take to safeguard your mutual fund investments during times of market volatility. When you diversify your portfolio across market capitalisations, such as large-cap funds, large & mid-cap funds, mid-cap funds, and multi-cap/flexi-cap funds, your overall portfolio’s risk is reduced.

Additionally, diversity aids in achieving the preferred risk-return aim, and you should diversify according to your financial objectives. Thus, by diversifying your mutual fund portfolio across investment styles (growth and value), equities, sectors, industries, and even geographic locations through overseas funds, you can decrease risk.

However, investing in a large number of asset classes relative to the size of your mutual fund portfolio would constitute excessive diversity, which could dilute your gains and reduce your returns.

Constant monitoring

After you’ve built your mutual fund portfolio, it’s just as vital to conduct periodic reviews and rebalancing of your portfolio strategy as it is to choose the appropriate asset allocation. When you conduct periodic portfolio reviews, you can assess your assets’ performance relative to the benchmark and the predicted returns.

Such portfolio assessments enable you to determine whether specific schemes routinely underperform in terms of risk-reward parameters across market phases. At this point, you may consider replacing them with a more suitable option. This monthly evaluation and rebalance will assist you in mitigating the effects of a severe bear market.

Invest using the rupee-cost averaging technique

The primary method for investing in rupee-cost averaging is through a Systematic Investment Plan (SIP), which helps reduce volatility and thus raises the overall return on your investment portfolio. With the help of a low-cost SIP, you may contribute as little as Rs 500 each month, which is beneficial for investors with a small investment amount.

The rupee cost averaging strategy equalises the price at which you purchase units of equities or mutual funds. It is a method of investing in which a fixed quantity of money is invested at regular periods. This guarantees that you purchase more units of a mutual fund scheme during periods of low market volatility and less units during periods of high market volatility.

That said, it is entirely dependent on how your investment management framework is constructed and how you manage your portfolio across market cycles. To weather any downturn scenario, an investor must have a strong portfolio strategy and establish an all-weather portfolio.

As a result, you must concentrate on building a well-diversified mutual fund portfolio, which involves selecting suitable mutual fund schemes that offer higher risk-adjusted returns, and the aforementioned points will assist you during difficult times.