Diversification : A Pill To Deal With Current Market Volatility
The covid-19 has impacted our life in a big way bringing many structural and lifestyle changes and has made it imperative for us to reconsider our financial priorities and investment strategies. In the first half of year 2020, we witnessed financial markets hitting all-time high as well as their lowest fall in decades. Market volatility is usually an expectation or reaction to a risk event.
While pandemic like Covid-19 and an intentional economic shutdown is unique, it brings out the importance of a diversified investment portfolio! The importance of ‘portfolio diversification’ has become prominent in today’s volatile times where putting all eggs in one basket has never been so risky.
What is Diversification?
Diversification is an investment strategy involving allocation of capital across different asset classes to reduce concentrated exposure to single asset, product or segment.
Though pandemics are uncommon, market corrections and volatility are not that rare. It is very difficult to predict which sector will get impacted during the next crisis. Therefore, a well-diversified portfolio is always desirable to ensure safety of returns.
Things To Remember While Diversifying
1. Avoid investing a lumpsum amount:
As we have learned the importance of diversification to overcome market volatility, we should avoid investing a lumpsum amount at any given time. Though low stock prices might seem attractive and tempt you to make large investment in one go, it can be counterproductive to assume that markets have hit rock-bottom.
In these unprecedented times, markets are highly volatile and therefore timing the market should be avoided. Spend progressively while gauging how the situation unfolds.
SIPs can be investor’s best friend during market volatility.
2. Never stop your existing SIPs:
Systematic Investment Plans (SIPs) are investment routes designed to help you sail the market volatility. SIPs involves investing a fixed amount of money in mutual funds at regular intervals. SIPs make timing the market irrelevant. With periodic investments, SIPs can help investors to average out the rupee cost. You get more units when the market is low and less units when the market is high. This average out the purchase cost for an investor.
SIPs is the best way to diversify your investments without the risk of entering the market at wrong time. With rupee cost averaging and power of compounding at work, continued SIPs during volatile times can bring attractive returns in the long term.
3. Invest for long term:
SIPs give the maximum benefit to the long-term investors. Looking at the past performances of financial markets, it has always recovered from sharp corrections and crashes in the long run. Though the required time to bounce back can vary across different crisis, markets eventually bounces back.
Though this pandemic is unique in its own ways, market is following the same cycle of correction followed by recovery. Long term investment strategy is the best strategy to optimize your portfolio’s performance.
4. Diversify at all levels:
Diversification is a key to a successful investment journey. Never put all your eggs in one basket. Try having a diversified portfolio within investment circles. Depending on your risk appetite, decide on the percentage of portfolio that you want to invest in equity mutual funds, Debt Funds, Bonds, and Term Deposits.
There are different diversification routes that can be opted for optimum portfolio diversification:
I. Funds across market capitalizations: If your existing portfolio is tilted towards blue chip or large cap focused funds, you can look at funds that offer good quality stocks in the mid-cap or small cap stocks.
II. Funds across geographies: Spreading your investments across geographies is a diversification on a global scale. In current pandemic times, different countries have been affected at different scale. Global funds are mutual funds that invest in securities of foreign companies listed in foreign markets. Investing in global funds, can give an investor the access to invest in the international equity market. Such diversification can save your portfolio from geographical concentration.
III. Funds across sectors: Uncertainty related to the coronavirus crisis has served as a stark reminder that discretionary spending on vacations, luxury items and other non-essential goods and services can dry up amidst such scenarios. Ensure that you invest across essential sectors like banking, health etc. Look at sector fundamentals and pick sectors expected to grow in the long run.
IV. Diversify across debt funds: There are various debt funds that are available to investors investing in different debt instruments giving investors an opportunity to diversify in this segment as well. There are short term, medium term, dynamic bond funds, liquid funds, money market funds, etc. Look at your existing portfolio, analyze it and then invest in funds that have no correlation to your existing investments.
Net Brokers Takeaways:
Given the current environment, it is important that investors maintain the financial discipline with respect to asset allocation and diversification. Times of volatility offer a great opportunity to re-evaluate and possibly rebalance your asset mix.
- Continue your investments strategically
- Do not redeem your current investments out of fear
- Concentrate on building a diversified portfolio
- Take your diversification to global scale and invest a proportion of your portfolio in global funds.
- Have a portion of your funds as ‘Emergency Funds’
The Covid-19 pandemic has acted like a reset button for the entire economy. Everything is being re-evaluated to adjust in a world that we are still not sure of. Fundamental investing principles still remains the same. Stay invested and diversified!
If you’re concerned about market volatility, and still confused on how to adjust your existing portfolio to optimise your investments, then don’t hesitate to talk to a financial professional.
Call Akhil Chugh +91-9811264927 for any financial planning assistance.