Investing in mutual funds – 3 key investment lessons from the first three months of 2022

The turn of the year 2022 has brought intense volatility to stock markets around the world. We have witnessed various events, such as the third wave of the COVID-19 pandemic (due to the Omicron variant), Russia’s invasion of Ukraine, sanctions imposed to deter Russia, boiling the price of Brent crude oil, inflation which and central banks are taking action to control inflation.

Even now, as I write to you, there are many headwinds or risks at play, particularly looming geopolitical tensions, inflation, and the likelihood of a fourth wave of COVID-19 in the coming months. That said, here are three key lessons we all need to learn from the first three months of 2022:

Focus on asset allocation and diversify optimally
In difficult times (and even otherwise), asset allocation will play a central role. When you ensure that the correct mix of stocks, debt, gold and even cash, for that matter, is held in the investment portfolio, this is a strategy in itself to reduce risk and generate returns. optimal yields. It is similar to the idea of ​​”
keep eggs in different baskets » was introduced to us early in life.

Fundamentally, it is important to recognize that not all asset classes move in the same direction at the same time. Therefore, there is no point in getting swayed and skewing your investment solely towards equities in hopes of generating stellar returns like you did in 2020 and 2021. Given the headwinds at play and the intense volatility looming, mitigate and set realistic return expectations.

The other asset classes viz. like debt and gold (the investment opportunities therein), can also help your investment portfolio achieve positive net returns. So, instead of just focusing on generating alpha through an equity fund, consider tactical asset allocation. To remember,
asset allocation is the cornerstone of investing!

Likewise, diversify your investments within a particular asset. For example, when investing in stocks, don’t just stick to stocks. Consider investing in a variety of the best equity mutual funds based on your risk profile, investment objective and time horizon. With the advantage of a professional fund management team, a smart investment strategy and a well-diversified portfolio, investing in mutual funds could be a rewarding experience. That said, be sure to diversify wisely between schemes with unique investment styles in line with your risk profile and don’t make the mistake of over-diversifying or the expected profit could be watered down.

It is the role of a wise man to save today for tomorrow and not risk all his eggs in one basket.” – Miguel de Cervantes (a Spanish writer).

Don’t stop investing, follow a sensible approach
Just because stock markets have become volatile, it is not a good idea to pause or stop regular investing. Markets, by their very nature, would remain volatile; it’s how you take advantage of volatility or a sell-off that determines the success of your investment.

Equity market history shows that despite overwhelming adverse events such as the 2002 downturn, the 2008-09 US subprime mortgage crisis, the 2009-10 Dubai debt debacle, more After the debt crisis in Greece, the slowdown in China in 2016, and the crash at the start of the COVID-19 pandemic in 2020, Indian stock markets rebounded well, supported by investor buying activity. Indeed, India continues to remain an attractive investment destination on the radar of many Foreign Portfolio Investors (REITs), Domestic Institutional Investors (DIIs) and High Net Worth Individuals (HNIs). They exude confidence in the long-term prospects of the Indian economy, supported by reforms alongside the demographic advantage it offers.

Even in the face of the COVID-19 pandemic and other challenges, companies have shown an encouraging trend in earnings. For a few quarters, even if earnings are down, don’t be discouraged because earnings don’t always move in a linear fashion. What you need to do is take calculated risks, devise a sensible approach, and keep investing.

Under current market conditions, consider investing in a staggered or piecemeal fashion rather than investing all of your excess investment at once. Alternatively, you can choose the SIP route to invest in equity mutual funds. Following these approaches will help you better manage downside risk and will prove significant in the long run. Keep in mind that in the journey of building wealth, your patience, persistence, financial discipline, and “time in market” matter the most!

That said, you need to review your investment portfolio in a timely manner. A “buy and forget” approach may not work, particularly with market-linked investment instruments. Suppose a semi-annual portfolio review would ensure that you own the performing investments and take the necessary actions.

Have an adequate emergency fund

“Nothing is more imminent than the impossible…what we must always anticipate is unforeseen.” says Victor Hugo (French poet, essayist, novelist, playwright and playwright).

Who knows what the future holds: good, bad or ugly? Just like in the markets, our life is not linear; there are unpleasant surprises or uncertainties that we have to deal with. If you hold adequate levels of cash, you may be able to manage the requirements better. During the lockdown and restrictions induced by the COVID-19 pandemic (which led to job losses and wage reductions), it was cash or a provident fund that helped several people through the crisis. Even in the future, with the fourth COVID-19 and geopolitical tensions looming, holding an adequate emergency fund would be your recourse. To remember,
Cash is king!

With regard to the question of
how much money you should have, there is no fixed amount. You should reasonably calculate an amount of money that will provide you with a financial safety net. But basically, you might consider holding at least 12-18 months of regular monthly expenses, including EMIs on your loans, as a contingency reserve. This money could be placed in a separate savings account, term deposit and/or
pure liquid fund. Avoid deploying your emergency fund in stocks. When managing cash for a rainy day or contingency, the safety of your hard-earned cash should be of paramount importance and not lead to higher returns.

In summary, don’t react to market volatility with undue stress. Instead, approach your investments objectively by designing a sensible approach. Keep emotions at bay while investing and avoid following the herd. Follow a cautious and scientific approach.

(The author is MD and CEO, Quantum Asset Management.)

Dolores W. Simon