Portfolio in Loss? What Can You Do?

“Mutual fund returns are subject to market risks”, a common phrase in every mutual fund commercial, is one of the most important takeaways. Through the investment in mutual funds have surged in the past few years, owing to increased awareness of the product amongst the general public, the invested capital has always been at risk.

If you’ve started investing in equity mutual funds in the past 2-3 years, it is quite possible that some investments in your portfolio are reporting losses or delivering low returns. In this article, we’ll look at these closely and try to look for possible solutions that you can implement in 2020 to become a smart investor.

In 2018 investors witnessed the worst market performances with Sensex dipping to an all-time low of 34,442 points. This reflects the high volatility of the equity markets, and the risk exposure of the investment in the same. In 2019 as well market volatility was seen owing to the budget, falling auto sector, low consumption etc.

There could be panic among investors, however, that should not override your decisions. A thorough analysis to find out the root cause of the losses is more advisable. Your investment portfolio can show majorly ‘loss-making’ funds due to two main reasons. Either the selected funds are in bad shape, or the market movement is critical.

Off the Mark Fund Selection

Out of your overall investment portfolio, look for those mutual fund schemes that are not performing upto the mark. These funds might not be delivering as good returns as their peers, or the benchmark. Scout these funds from your investment portfolio and don’t hesitate to sell them.

Although, one should do an in-depth analysis of the costs of exiting the fund. These costs typically include exit load of the fund and capital gains tax. If the fund is reporting losses, one doesn’t need to worry about the capital gains tax, as there would be no effective capital gains. If you’ve stayed invested in the scheme for more than a year, the exit load is also zero.

You can rebalance your portfolio by switching to high quality mutual fund schemes, with impeccable historical performance and decent future prospects.

The Capital Market is in Bad Shape

In this case, there’s not much at the investor’s hand, but to remain invested. Market sentiment changes every other day, it is highly important that you don’t give in to the temptation of selling your assets off in the wake of unfavourable market movements. Here is a list of some of the ways through which you can reduce the losses incurred from unfavourable market movements.

1. Remain Invested: Do not realise your losses by exiting in a state of panic. The Nifty 50 dipped from 6000 levels in 2007 to 3000 in 2009, as the world financial crisis hit. Anyone who left the market at that point would have realised a 50% loss. However since that point, the Nifty has tripled since then and now sits at 11,000 levels. A gain of 3 times over in just nine years translates to a CAGR (Compounded Average Growth Rate) of 13% – enough to generate a great deal of wealth. At the end of it, an investor who stayed put would be sitting on a 200% gain.

2. Spread your investments: During a bearish market, investors can spread their investment through SIPs or STPs. Investment in mutual fund via Systematic Investment Plans (SIPs) wherein an investor makes periodic installments in a mutual fund schemes at predetermined intervals.

STP (Systematic Transfer Plan) transfers a fixed amount from a liquid fund into a mutual fund every month. Both these vehicles are better suited to downward trending markets. They allow you to get more units of your chosen mutual funds at lower prices.

3. Look for strategic entry points: A market dip is also an opportunity. It gives you a chance to increase your holdings of mutual funds and make larger profits when market revives. If you do not want to do this through SIPs/STPs and have a strong risk appetite – you can make lump sum investments when the market drops.

However, this can be quite risky if the market keeps on falling as you have to be then stay invested for at least a period of 5 years to see real results. Although, the gains from such strategic investments are pretty high.

4. Remember, time is in your favour: In the long run, the market moves in an upward direction owing to positive GDP growth in the long run. Thereby, it is advisable to not react to short-term market fluctuations and stay invested for a long term, in case of equity instruments.

2020 could be the year which sees global political and economic policy changes, this leaves one with a huge potential to invest and make profits in the short and long run.