Riding the market ups and downs: Staying calm with equity mutual funds
The possibility of earning high returns is one of the biggest attractions of equity mutual funds. However, with high reward comes high risk. Equities are inherently more susceptible to market volatility which can create both opportunity and anxiety for those invested in them.
The fluctuating nature of equity funds often lead many to second-guess their investment choices or act impulsively. But the truth is, stock market volatility is normal. Factors like supply-demand dynamics, speculation/expectation, monetary policy changes, and international occurrences particularly influence the equity market. The key is to adopt a long-term approach, manage emotions, and stay calm during fluctuations to enjoy the benefits of higher returns over time.
Importance of patience with equity funds
Prevention of impulse selling: A drop in stock market numbers often sends investors into panic mode. Many end up selling their holdings to avert further losses. This knee-jerk reaction usually leads to regret. When the market rebounds, which often happens, you miss out on potential gains. Therefore, not selling on impulse proves beneficial.
Capitalising on low prices: A falling market signifies more than just declining portfolio values. It also presents an opportunity. With lower share prices, you can buy more mutual fund units. More units mean more potential for profit when stock prices ascend. This strategy is “buy low, sell high.”
Benefiting from compounding: Time benefits those who stay invested for extended periods. The longer you stay in, the more your money compounds. Compounding increases your gains exponentially over time. Exiting due to short-term market swings reduces this advantage.
Transaction costs add up: You may have to pay fees every time you buy or sell. Each hasty move might appear harmless but can eat into your profits over time. A buy-hold strategy minimises such costs, adding to your long-term gains.
So how does one keep calm during market ups and downs?
Know your goals: With a clear picture of your financial goals, panicking becomes less likely. You invested for a reason, be it retirement or buying a home. When the market shows a downturn, remember your purpose. With a long-term goal, you will realise that a temporary slump won’t make a big difference.
Diversify investments: Placing all your eggs in one basket sounds risky. Diversification remains key to staying calm when markets take a hit. By spreading your investments across different equity funds, asset classes, and sectors, you minimise the risk of massive loss. This balance maintains the overall health of your portfolio.
Regular monitoring, not over-checking: While keeping tabs on your investments is important, obsessively checking their daily performance can add stress. Opt to review them on a monthly or quarterly basis. Use that time to evaluate the portfolio, adjust if needed, and re-align with your goals. You will find that less frequent monitoring makes you more focused on the bigger picture.
Avoid market noise: Many online platforms, news channels, and forums will offer their opinions when markets fall or rise. Limit your exposure to such platforms, and concentrate more on reliable data and facts. Following credible sources allows you to make informed choices without feeling swayed by market noise.
It can be difficult to resist the urge to panic during times of volatility. Still, history has shown that it is more beneficial for equity fund investors to stick to a plan and stay invested for the long term. If market fluctuations make you uneasy, seeking professional advice can prove valuable.
They offer more than just investment tips. An advisor crafts a portfolio that suits your risk tolerance, financial objectives, and life circumstances. They can recommend combining different types of equity funds and other asset classes in a portfolio. You might merge large-cap with small-cap funds or add a touch of international funds for global exposure. This approach makes your portfolio resilient against market shifts.