When the going is good, you are motivated to stay committed to your investment. It is the falling markets that cause anxiety among investors. There are not many pointers on how to invest in a falling market. Here are a few investment strategies that work well during a bear phase in the market.
1. If you have a systematic investment in equity instruments; continue investing:
Often, the mistake that people do is stopping their systematic investments in mutual funds when the markets start to fall. This is primarily due to a lack of knowledge and a deeper understanding of this rupee-cost averaging concept which underlies the systematic investment plan.
The more you invest during a downtrend, the lower will be your average purchase cost per unit of the mutual fund (or equity stock). It is of utmost importance that you continue to stay invested during the downtrend to optimise your returns and reduce your risk.
2. Any debt fund lying idle, start a systematic transfer into equity investments:
It is often seen that many people keep funds idle in debt instruments, however, not so much in debt mutual funds. However, if you do have any funds lying in debt instruments for whatever reason (possibly for a very short-term emergency, lifestyle expenditure etc.,), then you may consider deploying them into equity instruments.
The systematic transfer route is where an equal amount gets debited from the debt fund and is deployed into equity funds. This can be done provided you do not require the corpus in the near future. Investing in equities should be done only with a minimum 3-5-year perspective.
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3. Create Emergency Fund:
Falling market not just affect stock market it can also impact overall economy and increase inflation. One should always have amount equivalent to minimum 2-3 month’s expense as an emergency fund.
4. Too much exposure in equities reallocate:
Assessment of risk appetite during good times often does not align with the true appetite of the investor, but when they see their funds losing value during bear market phase. If the market has not fallen too sharply and eroded your corpus, then based on consultation with experts and after getting an idea of what the prospects of the markets are, you can consider moving a part of it to debt instruments.
A downward market cycle also provides a true sense of how much risk you are willing to take. This should be used as a cue for any future portfolio reallocation as well.
5. Increase your defensive bucket:
Market falls can be quite steep, it can hurt your portfolio pretty badly. A prudent investor prepares for this day. You should always add defensive industries within your portfolio to the extent you intend to ensure that you build a portfolio weather to any storm in the markets.
Companies with stable earnings, consistent dividend yield and healthy financials should be looked at. Sectors such as FMCG, and pharma are defensive as they continue to demonstrate sustained revenue during downtrends in the economy.
6. Always hold a well-diversified portfolio:
The key to building a portfolio that can sustain bear markets is to hold assets that are negatively correlated.
For example, equities and gold have traditionally demonstrated a negative correlation. There is a growing of cryptocurrencies being negatively correlated to equity shares.
However, if you do not have a deep understanding of any investment, it is best to stay away from it until you gain enough understanding and can make an informed decision.
7. Keep calm and stay invested!
The markets have always had peaks and troughs in the past, it is not only the inherent nature of markets but also a part of their evolution. Remember, that this too shall pass and the markets will be a bounce back.
While it is important to stay invested, it is the quality of the portfolio that matters the most. Most stocks are likely to go down during a bear phase, however not all of them bounce back. Hence, whilst investing in any stock, don’t do it to follow a fad, make informed investment decisions always.
Also, don’t beat yourself if you have made a bad investment choice, just let go of the investment. Vent, recover and move on to better pastures, just as you would do in life!
Additional Read: Safe investments to ride out market volatility
Hope these tips help you to come up with investment strategies for a falling market that best align with your financial objectives. You can also reach out to experts at Tata Capital Wealth who will be able to guide you with your investments in good times and stand by you during bad times as well.