Mutual Funds: Tips to Make the Most of Bearish Markets

While the term bull is used to describe a period of upward movement of stock prices, the term bear refers to a decline in price. It may come as a surprise, but with the correct investment strategy, one can profitably ride the bear wave too.When it comes to mutual funds, the schemes that are directly impacted by a bearish trend are equity-oriented mutual funds. This is because equity funds invest in stocks issued by companies. In a bearish market, an equity fund’s assets (primarily, stocks of companies) under management are impacted.With the correct course of action and a few tips and tricks, investors can make the most of bearish markets. Let us explore how.

Bearish markets are characterized by successive lower peaks and even lower troughs. Since the share prices are low, bearish trends provide favourable entry points to mutual fund investors. A point to note is that the downward trend may continue for a considerable period of time. Therefore, investors must only decide to trade in a bear market if they have the capacity to hold their investments for a long period.

When markets are performing well, everyone wants to hop on the bandwagon. But when markets are on a downward spiral, everyone starts panicking. Most mutual fund investors too end up anticipating deeper corrections and redeeming their units.Investors must stay calm during such times and not let their emotions drive their investment decisions. Timing the exit point is as important as timing the entry. There is no need to indulge in panic selling and unnecessarily book losses, especially if one doesn’t have urgent liquidity requirements.

A bearish trend may deter mutual funds investors from making fresh investments or even prod them to start redeeming existing investments. Instead, investing in SIPs during a downward market trend allows investors to pick up more units at lower NAVs, thereby facilitating rupee cost averaging. This will help investors to eventually amass a larger amount and aid their financial goals.

Risk profiling is an approach to understand the risk appetite of investors. Even if investors have evaluated their risk appetite, a bearish market cycle comes with a different set of variables-both, with respect to the market and the investor. Investors may have different liquidity requirements, return expectations and investment goals at different stages.To get a clearer picture, investors must reassess their risk profile during a bear market, especially if they had assessed their risk tolerance during favourable periods. In Conclusion Thus, there is no need to fear bearish markets. Yes, it can be difficult to predict downward market trends. But by employing the correct approach, investors can not only hedge against their losses but also book profits.

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.