Is it possible to eliminate the risk of the market in mutual funds?
Risk is an integral part of life. Be it a new project or an investment, and there is an element of risk in everything. All assets, irrespective of how secure the promises they make, carry a degree of risk. However, the degree of risk varies per the type of investment. For instance, stocks are riskier than bonds, equity mutual funds are risky than debt mutual funds, and so on. It is impossible to eliminate market risk in mutual funds or any other investment.
However, it is possible to minimize market risk in mutual funds by following these effective strategies:
- Create a diversified portfolio: Diversification is the most effective medium to reduce market risks in mutual funds. Creating a diversified portfolio allows you to distribute your funds across different assets and sub-assets, enabling you to recover the loss of one section from the profits of another. Whether it is equity, debt, or balanced mutual funds, you have an option to diversify in each type of scheme. Hence, when investing in a mutual fund, check their portfolio diversification. For instance, if you invest in an equity mutual fund, make sure your portfolio comprises large-, middle- and small-cap stocks, all optimally distributed across different sectors. Similarly, avoid investing in a single fund house. Choose varied schemes from other companies.
- Opt for a SIP: A SIP (Systematic Investment Plan) allows you to invest a pre-defined sum at regular intervals for a fixed period. When you pay an installment, you get units of the mutual fund equal to the value of your fixed investment as per the current NAV (Net Asset Value). This reduces the risk of market volatility lowering your mutual fund units. Further, investing through the SIP mode gives you the benefit of rupee cost averaging. Hence, when the market is high, you get fewer units, and when it is low, you buy more mutual fund units through your SIP. You do not have to time the market, and volatility risk reduces.
- Avoid similar schemes: When investing in mutual funds, ensure you are not overlapping plans. You could end up investing in the same sector or theme, which could defeat the purpose of diversification and leave your portfolio concentrated in one specific area, thereby increasing the risk. For instance, equity mutual funds do not just invest in the large-cap technology sector. Choose a mutual fund scheme that contains middle-and small-cap funds from the same industry. Small-and middle-cap portfolios can cover the losses when the large-cap mutual fund scheme underperforms. Before investing, check the objective, risk ratio, expense ratio, scheme type, and category and subcategory diversification of a mutual fund scheme.
- Periodically monitor and review your portfolio: To minimize market risk in mutual funds, it is critical to timely monitor your portfolio. This will help you ascertain if the portfolio is performing well and is on track towards your financial goals. During the review process, eliminate any mutual fund schemes that have consistently recorded poor performance. However, be mindful of the taxation involved. Moreover, check the scheme’s risk level; sometimes, a market change can alter the risk ratio of a mutual fund scheme.
Use the Tata Capital Moneyfy app to start your mutual fund investment journey. The Moneyfy app allows you to compare different mutual fund schemes. You can also track, monitor, and review your portfolio through the Moneyfy app.