Falling Markets have the tendency of creating a panic amongst investors, instigating a fear of losing all their money, especially if the money has been put into equity investments. However, the reality is far detached. There are certain investment opportunities that are only offered by bear markets.
There are numerous methods through which one can mitigate financial risks and increase investment returns. Here are some of the steps which investors can follow to hedge themselves against potential risks a bear market poses:
1. Review your Investment Portfolio
When the markets are down, investors tend to sell their securities dreading future losses. This is the worst decision you can take during falling markets. Not only are your returns reduced, but you also lose the chance of capitalizing on certain investment opportunities.
When the markets fall, not all sectors fall in unison. There are certain sectors which tend to rise. Typically IT and Pharma stocks rise when the markets fall in tandem with the rupee. This is because such companies have earnings in foreign currency and these rise when the rupee falls. Similarly FMCG stocks move in a less volatile fashion than the overall markets and often rise during market turbulence. These sectors are called ‘defensive sectors.’
An investor can buy units of mutual funds that specifically invest in these sectors. Prominent examples of these are Aditya Birla Sun Life Digital India Fund for the IT Sector, Reliance Pharma Fund for Pharma and ICICI Prudential Bharat Consumption Fund for Consumption Sector.
2. Invest in large cap/blue chip companies
Large cap companies are those companies which rank from 1-100 in terms of market capitalization, as per SEBI Guidelines. They are relatively less sensitive to market fluctuations and protects investment returns during falling markets. Because of stable earnings and, proficient and experienced management, these companies are well versed in dealing with adverse market conditions.
Instead of directly investing in equities of large cap companies, investors can also opt for mutual funds that specialize and invest in equity and equity-related instruments of large cap companies. For instance, Mirae Asset Large Cap Fund and Axis Blue Chip Fund are few large cap funds which have consistently given good returns over the years.
During falling markets, you can switch your investment, if any, from small and mid-cap funds to large cap funds, to secure your investment from declining further.
Also Read : Best Large Cap Funds to Invest in 2020
3. Switch to Debt securities/debt funds
Debt securities such as bonds and treasury bills have long been considered a safe bet in terms of getting decent investment returns. These securities are referred to as fixed-income securities as they yield fixed returns on your investment. The falling markets have low to zero impact on the returns from these securities. Thus, switching from equity securities to debt securities can dramatically reduce the risk arising from bear markets.
Debt Mutual funds which invests in different debt securities is another investment option which can be considered for investment as they diversify your investment portfolio.
4. Invest via SIP
Mutual fund investment via Systematic Investment Plan (SIP) has an in-built mechanism for reducing risk. When you invest via SIP, you invest a fixed sum of money at predefined regular intervals.
Therefore, during falling markets, when the Net Asset Value of the fund decreases, you automatically buy more units of that mutual fund. Thus, through SIP installment, an investor acquires more and more units of a mutual fund during bear markets.
Also Read : Best Mutual Funds for SIP to Invest in 2020
5. Keep Calm and Carry on!
The strongest antidote to a falling market is patience. You have to endure the market correction without reacting to alarmist headlines or panicking. Media headlines tend to amplify the dangers of a falling market during these times and investors should learn to ignore them. You should instead focus on your financial goals and have a long term investment horizon to build your wealth.
