What should mutual fund investors do in a market downturn?

What should mutual fund investors do in a market downturn?

by 5paisa Research Team Last Updated: Dec 11, 2022 - 12:00 am 23.3k Views
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Markets have been declining for 6 to 7 months and are still showing faint signals of reversal. So, what should mutual fund investors do? Let us investigate.

When it comes to investing in mutual funds, investors are concerned about a variety of factors. Investors are questioning whether they should leave their investments and sit in cash now that the indices are showing signs of revival.

Let's look at what you should do as a mutual fund investor amid a market downturn.

Ignore NFOs 

Most mutual fund distributors will try to offer you the New Fund Offer (NFO) for one simple reason: increased commissions. When the market is sliding, however, avoid NFOs. This is because its performance may surprise you (in a negative sense) in the near term, influencing your subsequent investment decisions due to fear of loss.

As a result, if you are new to mutual funds, you should avoid NFOs at all costs. In reality, invest in funds that have an excellent track record and have consistently outperformed their category average in terms of risk and return factors.

Fund selection

Do not merely consider a mutual fund's previous trailing performance if you are an opportunist looking to invest during a bear market. However, consider its performance during the bear phase.

This is because the lower the fund sinks, the shorter the time it takes to recover and begin providing returns. In actuality, you may also choose funds based on how well they performed as the market moved from a bull phase to a bear phase to a bull phase again.

Look for consistency

Instead of basing your investment selection on point-to-point trailing returns, consider consistency in performance delivery. Based on point-to-point returns, you may get a distorted view since they are impacted by how the fund performed at that moment in time.

As a result, it is prudent to examine either the returns over discrete periods or the rolling returns. Furthermore, the fund's performance should be assessed throughout at least two entire market cycles, that is how the fund fared in two bear periods and two bull phases.

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