Maintaining Your Portfolio: Strategies for Mutual Funds in Turbulent Markets

11 March, 2025

Synopsis 

• Investing in turbulent market times requires strategic approaches through mutual funds. 

• Mutual funds provide professional management, diversification across sectors and market caps, and risk management through derivatives and economies of scale. 

• Selection criteria include consistent track records, strong research capabilities, balanced exposure across market caps, and experienced fund managers. 
  
  

An uneven, bouncy wicket scares batsmen, but they don’t quit playing cricket. Instead, they keep playing but use helmets for protection. The helmet protects them from major injuries, though minor injuries can’t be ruled out. Quitting would mean a loss of reputation and a huge financial loss as batsmen would miss out on match fees and endorsement fees over time. Investing is not too different. Volatility and economic uncertainty make the market pitch unpredictable. Those scared stop investing and miss out on potential opportunities to make good money. The smart and the brave investors use helmets to take on market volatility and play on. In markets, mutual funds are like helmets – a mutual fund investor usually escapes major losses, though minor losses are possible.  Investing in turbulent times via mutual funds can provide stability and growth potential for investments, even in turbulent times. This helps you meet long-term financial objectives by recording inflation-beating returns. 

Why Equities Remain Attractive? 

Equity markets go through ups and downs due to various factors, but over a long period, this volatility gets neutralised.  Historically, on average, they have delivered inflation-adjusted returns. So, avoiding markets altogether means losing out on earning this equity risk premium.  Also, when stock prices decline, the earnings potential of companies does not diminish. Their price-to-earnings ratios become attractive for long-term investors. Investing a fixed amount regularly through Systematic Investment Plans allows you to buy more units when markets are low. This rupee cost averaging helps increase potential gains when the inevitable recovery happens. 

How do Mutual Funds help? 

Instead of selecting individual stocks, investing through mutual funds provides professional management by experienced fund managers. They have the expertise to identify sectors and companies that perform well even in challenging scenarios. 

Further, mutual funds offer diversification by investing across industries and market caps. This contains risks compared to investing in just a handful of stocks. Mutual funds utilise tools like hedging against the downside by using derivatives. A large investor base provides economies of scale. These benefits potentially enable funds to deliver steady returns. 

Choosing the Right Mutual Funds 

Not all mutual funds will perform equally well during market turmoil. Following are some tips to pick suitable mutual funds during uncertain periods: 

• Select funds with long-term consistent track records across market cycles 

• Prefer fund houses with solid in-house research capabilities and robust risk management 

• Look for reasonable exposure to high-quality mid and small-cap stocks besides large-caps 

• Evaluate funds with flexibility to change allocation between equities and debt 

• Opt for funds with experienced fund managers adept at navigating volatility 

Review asset allocation across equity, debt, gold and other assets. Rebalancing helps mitigate risks. Do not attempt to time the markets. Instead, use volatility to make periodic investments to units at attractive valuations. Stay invested over the long term while monitoring performance at regular intervals. 

Debt Funds for Stability 

For stability and steady returns even during stock market corrections, include mutual debt funds in your portfolio, especially if you are nearing maturity. Debt funds predominantly invest in fixed-income instruments like treasury bills, government and corporate bonds, etc, issued by reputed entities. Based on the maturity period of underlying bonds, debt funds include: 

• Liquid funds – Park surplus cash not needed immediately 

• Short-duration funds – Hold bonds maturing in 1-3 years 

• Corporate bond funds – Earn higher returns by lending to companies 

• Gilt funds – Invest in government securities offering safety 

Debt fund returns may be lower than equity but provide capital preservation and regular income. Choose suitable debt mutual funds to offset equity risks. 

Avoid Timing the Markets 

Many investors stop their Systematic Investment Plans during market falls and wait for stability before restarting investments. But this market timing approach is seldom successful. Equity markets can bounce back soon, and investors fail to benefit from the move. 

Instead, continue with disciplined investing through SIP during downturns. This will fetch you more units when valuations are low, magnifying your gains in the subsequent recovery. Have faith and patience instead of trying to time market ups and downs. 

Stay Informed 

During periods of uncertainty, have reasonable return expectations and focus on asset allocation instead of chasing high returns. Seek professional advice if required. Stay abreast of financial news and expert views, but do not get swayed by extreme negative sentiment. 

Review your mutual funds periodically, but avoid abrupt portfolio changes due to temporary factors. The long-term growth story of India remains intact despite periodic challenges. Maintain discipline and take advantage of market corrections to build your nest egg. With robust research and balanced investing, mutual funds can help you navigate turbulent times during the journey to your financial objectives. If market volatility scares you and you cannot choose suitable mutual funds, a new ‘helmet’ is in town - the HDFC Bank SmartWealth App! You have to download the app from Playstore/Appstore, and this DIY app chooses those mutual fund schemes that can help you score runs even on a bouncing and spinning market track!   


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