July 20, 2024

Apart from making mutual fund investments convenient and potentially affordable, Systematic Investment Plans can also help investors leverage market volatilities via rupee cost averaging. 

When you start a SIP, a fixed amount is invested into the scheme of your choice regardless of the current market trend. As a result, you purchase more units when prices are low and fewer when markets are on the upswing. This aligns with the traditional investment wisdom of buying low while also potentially reducing your per-unit investment cost so that you are better poised to potentially earn good returns.

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Investors who want to proactively manage investments and get potentially higher returns while mitigating risk can further adapt their investment strategy in response to market trends. Here are some ways to do so:

1. Stay up to date: Be aware of what’s going on in the market so that you can anticipate ebbs and flows or keep an eye on larger patterns amid temporary ups and downs. News, financial websites, market data, and market sentiment indices are among the ways to do so. Also keep tabs on monetary policy announcements, especially about interest rates. When the central bank raises interest rates, it can adversely impact debt as well as equity. Such awareness is the first step towards managing volatility. 


2. Increase equity investments during bear markets: The main reason for investing in equity is to potentially make capital gains. However, equity markets can be very volatile in the short term. If you want to time the market, you can add equity funds to your portfolio or increase the instalment amount of ongoing equity SIP investments during bear markets or periods of high growth. However, this strategy can be risky and will require precise knowledge of when to enter or exit the fund. 


3. Increase debt investments during bull markets: During a market slump, fixed-income instruments can be relatively stable than equity as they tend to entail lower risk and potentially provide more stability. Increasing your debt allocation during a slowdown can help anchor your portfolio in a turbulent market and mitigate impact on capital. If both equity and debt are volatile, you can consider a third asset class such as real estate or gold via exchange traded funds, among other options.  


4. Rebalance when markets stabilise: Once the markets are back on track, you should revisit your portfolio allocation to return to your original debt-equity mix. Your original portfolio allocation would likely be designed according to your financial goals and risk appetite, so straying too far from it unless your investment targets or risk tolerance have changed could hurt your financial well-being. 


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5. Maintain a diversified portfolio: The strategies mentioned above are better suited to investors with some expertise and familiarity with financial markets. Other investors who want to manage their portfolios proactively but do not want to time the market can ensure that they have a diversified portfolio with debt, equity, and other asset classes such as derivatives, commodities, or real estate. Hybrid funds, which include both debt and equity, could also help achieve such diversification. 


6. Opt for dynamic allocation strategies: Another way to potentially navigate market volatilities is to invest in funds with a dynamic asset allocation strategy. Examples include debt-equity hybrid schemes such as multi-asset allocation funds and balanced advantage funds, which can alter their debt-equity ratio based on prevailing market conditions. Within fixed-income funds, dynamic bond funds can flexibly manage their portfolio allocation between securities of different maturities to potentially risk and optimise yield. Flexi cap mutual funds can alter their allocation between large-cap, mid-cap, and small-cap stocks based on market performance. 


7. Keep your eye on the big picture: Fluctuations and volatilities come with the territory of investing in the financial market. However, those with a long-term investment horizon should steer clear of impulsive decisions or significant strategy changes in response to short-term trends. Markets may witness a significant slump during unprecedented events – such as the recent Covid 19 pandemic – but typically return to normalcy in a three-to-five-year horizon. So, a major rethink in your portfolio allocation may only be necessary if you have a short investment horizon or are nearing the end of your investment tenure. 

Conclusion:

SIPs can be an effective and disciplined way to invest in the financial market while potentially mitigating risk. Investors who want to manage their portfolios independently should stay on top of market trends and can choose to revise their portfolio allocation – by halting, reducing, or increasing their SIP investments with the help of an SIP top up calculator – in response to what asset classes are underperforming or doing well in the market. Be careful, however, not to make impulsive decisions or react to short-term volatilities if you have a long investment horizon. Do adequate research and if possible, consult a financial advisor before making any major changes to your investments. Additionally, maintaining a diversified portfolio can help potentially mitigate some of the downside risks or capitalising on asset classes that are performing well. 

About Bajaj Finserv Asset Management Ltd.

Bajaj Finserv Asset Management Limited, a wholly-owned subsidiary of Bajaj Finserv Limited, has entered the investment solutions industry. Backed by one of India’s most respected and oldest brands, it offers a host of innovative products and solutions to every Indian. With a future-focused and differentiated investment strategy, its ambition is to help every Indian achieve his/her financial goals.

Mutual Fund investments are subject to market risks, read all scheme related documents carefully.


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How to adapt SIP investment strategies to changing market conditions first appeared on Web and IT News.

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