Seven golden rules to preserve capital during a market downturn

6 MinsApril 30, 2020

Over the last few months, particularly since the outbreak of Coronavirus or COVID-19, the heightened volatility of equity markets in India (and across the globe) has foxed investors. The market has seen more than 25% correction in barely a couple of months with further correction that cannot be ruled out and the bottom is still unknown.

In such times, you, as an investor, need to gauge how much risk you are willing to take and employ the necessary measures to protect or preserve capital.

market downturn

What is capital protection?

Capital protection does not strictly mean warding off negative returns. Losses are inevitable when the equity market hits turbulence and descends. Hence, what ‘capital protection’ actually means is cutting down on a disproportionate loss, wherein the damage is measured and well-contained. Here’s what you should do.

1. Review and rebalance your portfolio

The performance of your overall investment portfolio is hinged on the investment avenues held. In times when returns from equities have fallen and interest rates on many fixed-income instruments have declined, carry out a comprehensive portfolio review and rebalance the portfolio.

This will help you know if your investments and the time frame for the investments are aligned to your risk profile, investment objective, financial goals. This will also help cull out underperforming and unsuitable investment avenues and replace them with suitable ones. While all equity funds will be under pressure, look for funds in which the losses are lesser as compared to others, and shift your investment to that fund. But do consider costs such as exit load, etc. That being said, it is equally important to evaluate if the fundamentals of your investments have changed, give sufficient time for your investments to grow, and not fan out every investment you have made. Thus, you can ensure that you are on track to accomplish the envisioned financial goals.

2. Continue with your SIPs

Do not commit the mistake of stopping or pausing Systematic Investment Plans in worthy mutual fund schemes as that will only put the brakes on achieving the envisioned financial goals. Continue SIP-ping into worthy mutual funds. In volatile times and downturns, you will automatically get more MF units for the same SIP. This will bring down costs in the long term when the NAV of the fund increases as the market improves. In fact, you could also consider increasing the SIP amount if your fund is performing relatively better to get more benefit.

[Also Read: 3 Avenues to Park Your Emergency Fund]

3. Invest in fixed income instruments as a buffer

To shield your portfolio, to address short-term goals and to build an emergency fund (amidst the COVID-19 pandemic) consider parking some money in fixed income instruments such as a bank Fixed Deposit and certain small saving schemes for secure and steady returns. Debt mutual funds are also a good option to consider and can act as a cushion for your portfolio during volatile equity market conditions.

4. Add gold to your portfolio

Likewise, consider allocating 10-15% to gold because the yellow metal has displayed its trait of being an effective portfolio diversifier, a hedge, and commanded a store of value in these uncertain times. On a year-to-date basis, gold has gained +5.0% whereas about +30.0% in the last one year.

5. Review and rebalance your asset allocation

Asset allocation refers to deploying the investible surplus into various asset classes – such as equity, debt, gold. Every asset class has a risk-return trait suitable for a certain level of personal risk appetite, investment objectives, financial goals, and the time horizon to achieve them. An intelligently crafted asset allocation will help you balance risk-reward by adjusting the percentage of each asset in the investment portfolio as per your age, risk appetite, the broad investment objective, financial goals, and time in hand before goals befall. Asset allocation, if done properly can make timing the market irrelevant and address your liquidity needs.

6. Diversify within asset class but don’t over diversify

Once the asset allocation is set right, you also need to ensure that the portfolio is optimally diversified within every asset class as well. Optimal diversification within asset classes can help minimise the losses in case of a market downturn. For instance, have a proportionate share of large-cap, mid-cap and small-cap among equity funds. You could also look at geographical diversification by investing in international funds. Similarly, have a balance of debt mutual funds and bank FDs in your fixed-income portfolio to get the tax benefit. However, in the attempt to diversify the portfolio to reduce the risk, do not over-diversify the investment portfolio as it often proves counterproductive: makes the portfolio overcrowded, and increases the burden of managing it. For instance, if you have too many large-cap mutual funds in your portfolio, they could be investing in the same companies and will not give you any real benefit.

7. Don’t follow the herd

Do not attempt to copy or mirror what your friends, relatives, colleagues, or next-door neighbours do; because investing and reviewing the portfolio, are individualistic. There is no one-size-fits-all approach. Stay focussed on your financial goals being cognisant of your risk profile, investment objective, and the time in hand to achieve the envisioned financial goals. Be thoughtful and refrain from investing in an ad hoc manner.

Disclaimer: This article is for information purpose only. The views expressed in this article are personal and do not necessarily constitute the views of Axis Bank Ltd. and its employees. Axis Bank Ltd. and/or the author shall not be responsible for any direct / indirect loss or liability incurred by the reader for taking any financial decisions based on the contents and information. Please consult your financial advisor before making any financial decision

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