3 Mutual Fund Portfolio Saving Decisions To Take Before Its Late

Just about a year ago, the SENSEX was hovering around the 40,000-mark. However, after the pandemic hit in March 2020, many investors realised the vulnerability of their mutual fund portfolio with the Sensex touching around 25,000.Where the equity markets crashed nearly 38% during the initial months of the year, it surged and recovered almost 50% during the June quarter. And just a few months later, the markets have soared to new heights with the Sensex crossing the 50,000-mark in January 2021. The graph below showcases the volatility investors had to face in the year 2020.While the COVID-19 pandemic was something never heard of , this cyclical movement in the markets is not something new. It has happened many times in the past, just as it will most likely happen again in the future. Thus, it can be taken as an instance to understand that the market conditions are almost unpredictable in the short term.To combat the unpredictability of this highly volatile equity market, you must plan and manage your portfolio accordingly and stay prepared for any unexpected situations. Let's look at the three most important decisions you must take now, to protect your portfolio even during turbulent times.

Since the stock market tends to be more volatile in the short-term, you must keep your focus on the long-term returns. The markets tend to perform better in the long run. For instance, have a look at the graph below to see how the markets have gone through cyclical movements of ups and downs (from 2014 to Feb 2021), but if you were to draw a line through the peaks, you would notice an ascending line.Thus, experts suggest buying and holding stocks for a longer-term since they almost always outperform the market's cyclical movements. But this is easily said than done for most investors. Holding your investments for long-term profits requires you to be comfortable enough to deal with your current and other expenditures coming up in the near future (say next 4-5 years).To address your short-term requirements, you must:

• Build Emergency Fund Work towards building an emergency fund that can cover all your basic expenses for a least a year or two. This can be done by investing with highly rated debt funds that are reliable and safe.
• Balance of Debt and Equity Funds Keep your equity investments minimum and replace it with debt funds while building a portfolio for short-term goals, since the equity market tends to fluctuate more in the short run.

By doing this, you are safeguarding funds for requirements to be addressed in the near future without disturbing the long-term portfolio. In case of major market blows also, your long-term portfolio will stay untouched and recover with time. Also, if your short-term expenses are taken care of, you can remain stress-free and can better focus on the long-term growth of your funds.

Ideally, investments should be made, keeping in mind that substantial growth can be achieved only in the long run. This investment approach should not be much affected by crisis such as Coronavirus since these are mostly temporary, and the market is expected to bounce back in the long run.But if the personal circumstances of an investor change, like job loss, health impairment, etc., the risk appetite may change accordingly. You can analyse your actual risk tolerance in the following ways and adjust the allocation in your portfolio accordingly:

• The Right Mix of Small, Mid and Large-Cap Know your risk-tolerance level and accordingly spread your investments among the large-cap, small-cap and mid-cap funds. Large-cap funds may be more suited for investors with lower risk tolerance, whereas small-cap funds come with higher return-potential but higher risk.
• Prepare for the Worst Assume that if the market sharply falls (say 20-30%), will you be able to tolerate this decline in your investment portfolio for the next few months. If your answer is no, revisit the equity allocation in your profile and try to bring it down till it matches your current risk tolerance.

After the above two decisions, you also need to plan and prepare for unexpected outcomes as below:

• Take Advantage of Opportunities You must look for opportunities if the actual situation deviates from what you planned initially. For example, you can earmark a portion of your debt to be used for investing in equity-based funds when the market falls. Make sure that you do it in a balanced way and as per your risk tolerance.
• Always Keep an Eye Out If everything goes as expected, you still need to keep an eye on how the different stocks, especially equities in your portfolio, are performing. If you observe an extreme downfall, you may consider lowering your equity allocations, though it is recommended to not deviate much from your original allocations.

To safeguard your portfolio, you must secure your funds for immediate and near-future requirements before planning your mutual fund portfolio for long-term growth. It is crucial to stay disciplined and patient while following your long-term plan. Also, keep a rough plan in your mind for different and unexpected scenarios.

The information contained herein is generic in nature and is meant for educational purposes only. Nothing here is to be construed as an investment or financial or taxation advice nor to be considered as an invitation or solicitation or advertisement for any financial product. Readers are advised to exercise discretion and should seek independent professional advice prior to making any investment decision in relation to any financial product. Aditya Birla Capital Group is not liable for any decision arising out of the use of this information.