What should mutual fund investors do during market meltdown?

It's crucial to rebalance the equity portfolio

Last couple of months have caused pain in global equity markets, and Indian equity markets in particular have suffered the most. The BSE Sensex has corrected by over 25% from its all-time high achieved on January 10. The fall that seems to have been triggered by global macroeconomic concerns has been accentuated by weak domestic data release. In just two months, the sentiment has slipped from unbridled optimism to morbid pessimism, both being extremes and hence not sustainable. A situation like this requires an objective and dispassionate assessment of concerns and positives in the environment.

There is no way to foretell when the sentiment will turn, or when the investor confidence will return. Existing mutual fund investors may be well advised not to allow panic and uncertainty dictate possibly disastrous investment moves. They need to remain focused on their financial goals and take a long-term view of the market. The longer one remains invested, the less is the impact of volatility. And for the new investors looking for price-value gap, these are like rare opportunities on a platter.

Investors with a 3-5 year horizon can take advantage of these opportunities by building an equity mutual fund portfolio using the SIP (Systematic Investment Plan) route over the next 6-12 months. Using this time tested and disciplined investors can gain tremendously through the benefits of rupee cost averaging. For more conservative investors, Debt funds, Debt PMS or Fixed maturity plans offer a good opportunity with a 12-18 month time horizon.

Having said that, probably now is the time to review the quality of your portfolio and stick to the principles of asset allocation. Asset allocation contributes 95% to the portfolios' returns. It is a function of your risk appetite and goals.. Thus in volatile markets if an investor has stuck to his recommended asset allocation suited to his risk profile then the debt in the portfolio will limit the downside.

To be a successful long-term investor, it is imperative to design a well-balanced portfolio and equally important is to rebalance it on a regular basis. Rebalancing becomes necessary because we make investments to achieve best results at an acceptable level of risk. By doing nothing, we violate this premise and get exposed to unacceptable level of risk.