4 Things To Do With Equity Funds Before Stock Markets Correct

Do you want to invest in the stock markets? Are you looking for inflation-beating returns to achieve your long-term financial goals? You may consider investing in equity funds that put most of your money in stocks. It helps you compound wealth over some time and achieves your financial goals. The Sensex and the Nifty have been highly volatile in the past weeks. It helps if you prepare for a stock market correction amidst the second wave of COVID-19.

Let’s look at the four things to do with equity funds before stock markets correct.

1. Check your asset allocation.

You have asset allocation as an investment strategy that balances risk and reward by spreading your assets across stocks, bonds, gold, cash and real estate. It adjusts the percentage of every asset in your portfolio depending on your investment objectives, time horizon and risk tolerance. 

Asset allocation protects your portfolio from stock market volatility as you invest across asset classes. For example, you may have a part of your portfolio in equity and equity-related instruments. It enhances portfolio return during a bull market. However, you also invest in fixed income securities that cushion your portfolio in a bear market. 

You may consider rebalancing your portfolio before a stock market correction. For instance, you may be willing to have around 50%-60% of your portfolio in equity investments. However, the bull run in the stock market may have taken your equity holdings to 70% of your portfolio. It will help if you rebalance your portfolio by liquidating a part of your equity holdings and investing in fixed income securities such as debt funds. 

2. Don’t stop your SIPs

You must invest in equity funds through the systematic investment plan or SIP to avoid timing the stock market. It helps you invest small amounts regularly in a mutual fund scheme. It teaches disciplined investing and gives you the twin benefits of rupee cost averaging and the power of compounding benefit. 

You must not stop your SIPs even if the stock markets correct. It helps you purchase more mutual fund units at lower market levels as the net asset value (NAV) falls. You can average out your investment costs if you continue SIPs for the long run, irrespective of the volatility in the stock market.

3. Evaluate the time to your financial goals 

You must shift your money from equity funds to safer debt funds if you are close to your financial goals. It helps protect your returns from a stock market crash. 

You may opt for the systematic transfer plan or STP to periodically switch mutual fund units from one scheme to another of the same fund house. 

For example, you could switch units from an equity mutual fund scheme to a debt fund scheme within the same fund house. However, you must choose the right debt fund that protects your capital rather than chase higher returns from this investment. 

4. Check your investment portfolio

You may have invested in equity funds without checking your risk profile. For instance, you may have invested in sector funds or mid-cap funds without understanding the risk involved in your investment. 

You have sector funds investing mainly in businesses belonging to the same sector or industry. It helps if you invest in these funds after gaining a thorough knowledge of this particular sector. 

You must invest in sector funds only if you can time your exit from the investment. Moreover, mid-cap funds invest in stocks of mid-sized companies and are suitable for aggressive investors. 

You must strengthen your core portfolio with index funds, ELSS and large-cap funds. It helps if you exit any equity fund that doesn’t match your financial goals and risk appetite. 

It would help if you diversified your portfolio to shield it from a stock market downturn. It helps if you move your investments from riskier equity-oriented funds to safer fixed income such as debt funds if you anticipate a stock market crash, closer to your financial goals. In a nutshell, you must continue your SIPs in equity funds irrespective of market conditions to achieve your financial goals. 

For any clarifications/feedback on the topic, please contact the writer at cleyon.dsouza@cleartax.in