Highlights
- Shall you invest in mutual funds amid recession? Yes, it makes sense as you can invest in top funds at low valuations
- When the market grows, you will benefit with greater returns
- Also, mutual funds offer a greater degree of diversification, making it an apt choice for investors in the dull market phase
With the news of automobile sector taking a major blow, the shockwaves are felt by the banking sector due to a drastic decrease in car loans. This has disheartened the mutual fund investors as the banking and financial sectors were the ones that contributed the most to their returns. Now, with the disclosure of GDP reports showing the economic growth to just 5% in the first quarter of FY 2019-20, question marks on mutual fund investments are raised further. Especially, SIP investors are losing it by seeing a red mark on investments started 2-3 years ago. But remember, patience is a virtue. If you invest in mutual funds in recession, you actually earn wonders, especially in growing markets like India.
How Smart Investing Decisions in Mutual Funds can help you Gain During Recession?
Economic slowdown shouldn’t deter you from investing in mutual funds. There are certain indicators that still show us that the market will rise from the ashes. And, when that happens, your investments will shine. All you need to do is wisely build a portfolio with maximum diversification.
Continuing your SIP Investments
All SIP investors seem to be worried with the red marker indicating a drop in the value of investments. The term “SIP (Systematic Investment Plan)” is mostly used in context to equity mutual funds. In order to reap the most out of equity funds, a long investment horizon is needed – minimum of atleast 5-6 years. There are only few equity funds that have done wonders in 1-2 year time frame. So if you are an investor who has made SIP investments for just 2-3 years and are planning to discontinue your SIPs due to the setback in economy – Bad Idea!
SIP investments work better in a fluctuating market scenario. As the market has hit lows resulting in the decline in the Net Asset Value (NAV) of funds, you can buy more units of the fund at a lower price. Gradually as the market starts picking, the value of your SIP investments will bring you more returns since you possess more units now. This phenomenon is called Rupee-Cost Averaging. So if you discontinue your SIPs during this period, you will not be able to seize this opportunity.
Invest In Safer Funds
Investors with a low risk appetite, who are not a fan of volatile markets, should go for safer funds that offer diversification opportunities. Hybrid Fund is one such option. During market lows, it acts as a hedge against market volatility through diversification. Like, investing in balanced advantage funds gives investors exposure to both equity and debt in varied proportions. The proportions can change based on market movements. During turbulent times, exposure to debt can be a savior in comparison to fund with a full equity exposure. Moreover, hybrid funds like multi-asset funds, offer investors higher diversification opportunities. Reason being they invest in multiple asset classes like debt, equity and gold. Investment in debt and gold can act as a cushion during the downturn, thereby bringing you modest returns.
Invest in Gold Funds
Diversification is a key factor that can safeguard you from the economic slump. Experts say that a portfolio exposure comprising 10-15% of gold can cushion you from the slowdown in the economy. So investment in gold exchange traded funds (ETFs) or gold bonds can help you fight tough economic times. Investment in gold securities shouldn’t be a seasonal measure but a permanent asset allocation strategy.
Invest in US Funds
Investment in international equities can insulate you from the economic crisis that India faces right now. This is also a great diversification method during these times. Firstly, the investment in US-based equity funds can help you generate good returns because the US economy is independent of India’s. So if the US economy is on the fly, you will make good returns. Secondly, you get the advantage of currency appreciation. Even though the investment and redemption is done in rupees, the fund is heavily based on dollars.
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Now, let's delve into the key concepts mentioned in the article and shed light on how mutual fund investments can be approached during a recession.
1. Economic Recession and Mutual Fund Investments:
- The article emphasizes that investing in mutual funds during a recession can be a wise decision. The rationale is based on the opportunity to invest in top funds at low valuations.
2. Diversification and Mutual Funds:
- Mutual funds are highlighted as an apt choice for investors during dull market phases due to the greater degree of diversification they offer. Diversification helps spread risk across various assets, reducing the impact of negative events in a specific sector, such as the automobile industry downturn mentioned in the article.
3. Systematic Investment Plan (SIP):
- The article advises SIP investors not to be discouraged by temporary market downturns. It underscores the importance of a long investment horizon, particularly in equity mutual funds. The concept of Rupee-Cost Averaging is explained, where buying more units at lower prices during market lows can lead to higher returns when the market rebounds.
4. Safer Funds and Hybrid Funds:
- Investors with a low-risk appetite are encouraged to consider safer funds, such as hybrid funds. These funds provide exposure to both equity and debt, with proportions adjusting based on market movements. During turbulent times, a higher allocation to debt can act as a hedge against market volatility.
5. Gold Funds for Diversification:
- Gold is highlighted as a key component for diversification, with experts recommending a portfolio exposure of 10-15% in gold. Gold exchange-traded funds (ETFs) or gold bonds are suggested as vehicles for investing in gold, acting as a cushion during economic slowdowns.
6. International Equity Investments:
- Investing in US-based equity funds is proposed as a method to insulate oneself from the economic crisis in India. The article cites the independence of the US economy from India's as a factor contributing to potential returns. Currency appreciation is also mentioned as an advantage, despite investments and redemptions being conducted in rupees.
In conclusion, the article advocates for strategic and informed mutual fund investments during a recession, leveraging concepts such as diversification, SIPs, safer funds, gold investments, and international equity exposure. These insights are geared towards helping investors make informed decisions in challenging economic times.
