The increased volatility of equities markets in India (and throughout the world) has perplexed investors in recent months, particularly after the advent of Coronavirus or COVID-19. The market has had a more than 25% drop in just a few months, with future corrections not ruled out and the bottom still unknown.
In such circumstances, you, as an investor, must assess the level of risk you are ready to accept and take the required steps to safeguard or maintain your cash.
What is capital protection and how does it work?
Negative returns aren't the only thing to worry about when it comes to capital preservation. When the stock market experiences turmoil and falls, losses are unavoidable. As a result, 'capital protection' essentially entails reducing a disproportionate loss, with the damage being quantified and restricted. What you should do is as follows.
Examine and adjust your investment portfolio
The investment outlets you hold determine the success of your total investment portfolio. Carry out a full portfolio assessment and rebalance the portfolio when equities returns have decreased and interest rates on numerous fixed-income instruments have fallen.
This will allow you to determine if your investments and the time frame in which they are made are appropriate for your risk profile, investing aim, and financial goals. This will also aid in the filtering out underperforming and inappropriate investment avenues and the replacement of them with more appropriate ones. While all equities funds will be under pressure, search for funds that have lower losses than others and switch your investment to that fund. However, costs such as exit load, etc. should be considered. It's also critical to assess if the fundamentals of your investments have changed, to allow enough time for your investments to develop, and to avoid fanning out every investment you've made. As a result, you can verify that you are on course to meet your financial objectives.
SIPs should be continued
Stopping or suspending Systematic Investment Plans in worthwhile mutual fund schemes is a mistake that will only slow down your progress toward your financial goals. Continue to invest in worthwhile mutual funds through SIPs. You will automatically receive additional MF units for the same SIP during turbulent times and downturns. When the fund's NAV rises as the market improves, this will lower costs in the long run. In fact, if your fund is performing well, you might want to consider increasing your SIP amount to reap greater benefits.
As a safety net, invest in fixed-income securities
Consider storing some money in fixed income instruments such as a bank Fixed Deposit and some minor saving plans for solid and predictable yields to protect your portfolio, meet short-term goals, and establish an emergency fund (during the COVID-19 epidemic). Debt mutual funds are another smart choice to consider, since they may function as a buffer for your portfolio during periods of high volatility in the stock market.
Add gold to your investment portfolio
Consider devoting 10-15% of your portfolio to gold, which has demonstrated its ability to serve as a portfolio diversifier, a hedge, and a store of wealth in these unpredictable times. Gold has gained +5.0 percent year to date, compared to +30.0 percent in the previous year.
Your asset allocation should be reviewed and rebalanced
Asset allocation is the process of investing surplus funds in a variety of asset types, such as stock, debt, and gold. Every asset class has a risk-return profile that is appropriate for a certain amount of personal risk appetite, investing objectives, financial goals, and time horizon. An intelligently designed asset allocation can help you manage risk and return by modifying the ratio of each asset in your investment portfolio based on your age, risk appetite, general investing aim, financial goals, and time left before achieving your objectives. If done correctly, asset allocation can eliminate the need to time the market and meet your liquidity requirements.
Diversify within asset classes, but not too much.
You must also verify that the portfolio is appropriately diversified within each asset class after the asset allocation is correct. In the event of a market downturn, optimal diversification among asset classes might help mitigate losses. Have a proportionate share of large-cap, mid-cap, and small-cap stocks among equity funds, for example. You might also consider investing in overseas funds for geographical diversity. To achieve the tax benefit, have a mix of debt mutual funds and bank FDs in your fixed-income portfolio. However, in an attempt to limit risk, do not over-diversify the investment portfolio, as this frequently proves counterproductive, causing the portfolio to become overcrowded and adding to the management load. For example, if you have too many large-cap mutual funds in your portfolio, they may all invest in the same firms and provide little actual value.
Don't go along with the crowd
Do not try to emulate or duplicate what your friends, relatives, coworkers, or next-door neighbours do when it comes to investing and portfolio management. There is no such thing as a one-size-fits-all solution. Keep your eye on your financial goals while keeping in mind your risk profile, investing purpose, and the amount of time you have to attain them. Take your time and don't invest on the heat of the moment.
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