When the stock markets crashed last year following the Covid-19 induced lockdown, many investors redeemed their mutual fund units. Fearing that their investment value would further nosedive amid market volatility, many pressed the panic button of redemptions and discontinued their investments. However, the Indian stock markets made a strong comeback within a matter of a few months and hit all-time highs. Stock market dynamics change rapidly and any knee-jerk reactions like redeeming your mutual funds may not help in the long run. Investors who stayed put benefitted whereas investors who had redeemed their units at lower valuation were at a loss.
If you are among investors who redeemed their investments, it’s time to stop regretting and focus on taking corrective measures to put your investments back on track. It’s better late than never. Here is a quick guide about what you need to do to streamline your mutual fund investments once again.
Take Stock Of The Redeemed Sum
There is a possibility that you may have used a part of the redeemed amount. So to begin with, figure out how much of the redeemed sum is still lying in your bank account. If it is possible to re-invest the entire amount, do it. If restoration is not possible, try not to touch the amount. In case the full redeemed amount is intact, keep it ready for investment in a staggered pattern.
Restart All Your SIPs
Restart all your discontinued Systematic Investment Plans (SIPs), at once, with the same proportion and tenure. Don’t let the high levels of the markets discourage you. Remember, it is not timing the market which helps you create wealth, rather it is the time spent in the market which generates wealth in the long term. If need be, you can discuss with your financial advisor about any addition of new schemes in the portfolio.
Make Additional Purchase Whenever Market Dips
Markets keep witnessing fluctuations and go through short-term correction phases. It’s advisable if you keep a tab on such dips in the market. Since you remained out of the market for a year, you need to be more alert about market movements to put your cash balance to use by buying additional units. You can consider adopting the strategy of ‘buy on dips’ in your mutual funds. This will put your readily available cash or redeemed money to prudent use.
Most mutual funds allow investors to do the additional purchase of units in their existing schemes or buy altogether new schemes. It will help you to lower your average purchase price –the Net Asset Value (NAV) — of your investments, which helps pad up your profit margins when you eventually sell your units. It’s important to note that buying when the market dips enables you to collect more units. As a result, when the market recovers and starts rising, your investment value will also increase. Such an approach is likely to help you to some extent in erasing some of your losses from the previous year.
However, while doing the additional purchases you should be careful of not putting all your available cash in investments in one go. This could prove hazardous at times. Instead, you should divert your cash to investments slowly and steadily, spreading it over a time frame of 6-12 months. Such a strategy will help you keep your investment cost low as purchased unit prices will be averaged out with time.
It will be a good idea to get in touch with your investment advisor to get guidance about additional buying in case you are unable to keep a watch on the market regularly.
Do remember that stock markets go through the cycle of uptrend and downtrend. So as a mutual fund investor, you need to be patient, disciplined and regular. Be cautious yet prudent while making your mutual funds moves. Do not panic. Before taking a call on redemption when the market crashes, ask yourself if you need the money? Is your financial goal (for which you started investments) approaching? If the answer is ‘No’, avoid liquidating your investments. Discontinuing long-term investments not only harm your financial planning but may incur damages hard to recover from.
Investments made in mutual funds are for long-term wealth creation. Stock market ups and downs better the prospects of making real wealth in life. Regular use of dips to buy more and stay focused on your financial goals irrespective of the market condition will prove to be of significant help. It works. Try it.
The writer is CEO, BankBazaar.com, an online marketplace for loans, credit cards and more.