Zakir Hussein* is a worried man these days.
After all, the Rs 3.5 lakh he has invested in various mutual funds is now worth a lot less. "The net asset value (NAV) of all these schemes is lower than the new fund offer (NFO) value! I wonder if I should exit all or hold onto them", he sighs.
With the markets in red for quite some time now, similar doubts have crept into the minds of many who have invested in mutual funds.
So, should you part with your units or cling to them? Or should you buy more?
Wealth eases out your confusion.
If market is your only concern, stay put!
Even at a time when the index is nearly half of what it was in January 2008, financial planner PV Subramanyam on subramoney.com suggests that Zakir should continue with his MF investment.
- Understand that a market which goes up can also come down. If you knew that and were investing, you knew about the risk.
- Unless you are in dire need of the money, exiting in nearly a 40 to 50 per cent loss is foolish.
- Equities in the past have shuddered and shaken but come back with equal resilience. If you redeem your units right now, you won't be able to make hay when the sun shines.
- Financial planner Sanjay Matai also echoes the view. "Zakir's decision to exit or continue shouldn’t really depend on the market fluctuations but on the economic conditions in the country."
- The recent government measures to cut interest rates, increase liquidity, reduce inflation etc show that despite the global turmoil, the Indian economy is stable.
When should you exit then?
The market swings should not be a deciding factor. However, there are other criteria based on which you can press the 'sell' button.
(1) Investment goals met
For example, if you have been investing for your child’s education and if he/she has reached that stage, you can withdraw from that fund to meet education expenses.
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(2) Change in fund's behaviour
This is when your fund's strategy changes and it does not fit in with your investment needs. For example, if a large cap fund invests in small caps and vice-versa. Also, if the fund is not true to its label, it is a worry. It's as simple as this – you wouldn't want Pepsi in a Coke bottle, would you?
(3) Poor performance
If your fund consistently delivers poor returns as compared to peer group funds and its benchmark index, it may be a good idea to exit. Say if you are investing for 15 years, then give a fund at least three years to compare. However, if you are investing for three years, you will have to review more often (every six months or so).
Should you buy more units?
Both, Subramanyam and Matai, insist on continuing with mutual funds, even though the NAVs are bleeding as of now.
"Investing through SIP (systematic investment planning) is always safe," continues Subramanyam, "over the next four to five years you will get a return superior to debt market returns."
In the meanwhile, Matai advises investors to read up as much as possible on investing, especially through mutual funds and gives the following tips.
Tip 1: Invest through SIPs
There are people who have invested through SIP for the past four years who have NAVs in the red. This is a cycle, so this loss is inevitable. However, this is the best time to average your cost of purchase and SIPs help you do this.
Tip 2: Rebalance your portfolio
Matai shows you how here.
Tip 3: Include large-cap funds in your portfolio
They can survive the downturn better. Add mid-cap and small caps after the market stabilises.
Tip 4: Think long term
While Subramanyam advises a long term view of seven years, Matai suggests a three to five year view but nothing less that that.
*Name changed to protect identity
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