Five ways to protect mutual funds from financial crises

Image result for protect mutual funds from financial crises

The money that you invest today could help you tomorrow. Investments like mutual funds can come in handy during emergencies or to pay for life goals. That is why it is important to protect your investments in a financial crisis. What happens when market conditions are unfavourable? Your mutual funds may not generate positive returns. This could lead to a rapid dwindling of your investment corpus. So, you must find ways to safeguard your mutual funds. India, like other countries, is prone to market fluctuations. You need to tackle these ups and downs that can lead to negative returns and other economic uncertainties.

Mutual funds—India: How to safeguard your investments

So, how do you go about protecting your mutual funds? Here are five ways that you could consider.

1. Diversify

One way of withstanding unstable market conditions is to diversify your investments. This means spreading out your money across various categories, sectors, and themes of mutual funds. It may happen that some of your investments are not performing up to the mark. In such a scenario, diversification will serve as a financial cushion.

Say, for instance, that you have invested in the infrastructure, pharmaceutical, and IT sectors. One of these sectors could be under-performing at a given time. You can then rely on positive returns from the other two sectors that are then performing well. In this way, you will be shielded from market risks and crises.

2. Reduce risk exposure

Risk means the unpleasant possibility that you could end up losing money on your investments. On the other hand, you stand to make a profit when market conditions are favourable. It is advisable to reduce your risk exposure during times of crisis. One way to do this is by decreasing your investments in high-risk instruments that generate greater returns. These include hedge funds, equity funds, and arbitrage funds.  

By reducing your risk exposure for a certain period, you protect your mutual fund investments from adverse market conditions. You can always go back to investing in high-risk funds when the markets start doing well again.

3. Invest in debt funds

Debt fundsare among the safest avenues of investing in mutual funds. These funds usually invest in high-grade securities and government bonds. Such products come with almost zero chances of default. The returns are predictable and consistent. In general, debt funds remain unaffected by market volatility. Hence, they are ideal for times of market turmoil.

 4. Increase international exposure

What can you do when the domestic market conditions in India are not favourable? Consider investing in international funds. Your investment will then get international exposure. You will also benefit from the added advantage of good returns.

5. Weather the hard times

Remember that rough market conditions do not last long. Don’t base your investment decisions on short-term turmoil. Take advantage of lower net asset values (NAVs) to buy more mutual funds units. This will benefit you when market conditions are restored to normal.

Summing up

It is possible to make the most of your mutual fund investments even during times of financial crises. Keep in mind the strategies given above. Also, track the performance of your mutual fund investments in a consistent manner. A demat account with an experienced firm like Kotak Securities will fetch you regular, consolidated statements.