NAVIGATING MUTUAL FUNDS IN FALLING MARKETS

Do not sell or stop your MF investments based on worrying headlines about market falls. Learn to manage this turbulent phase instead

- By Narayan Krishnamurthy

Stock market movements can often resemble heartbeats on an ECG monitor. The ticker fluctuates, going up and down and, yes, there are occasional spikes and dips in the markets just as your heartbeat varies in response to excitement or stress. To address this worrying nature of investors, the stock markets have a financial product—equity-oriented mutual funds (MFs). Unlike how a single stock reacts to stock market shocks, mutual funds are a basket of securities that offer a lot more cover.

Structurally, an MF pools the money of many investors and invests it for them in a collection of securities by purchasing stocks, bonds, money markets, and/ or other securities based on the fund's investment objective. According to the regulator SEBI, mutual funds can be broadly categorised as equity-oriented, debt-oriented, hybrid, solution-oriented and others. The equity-oriented category is further divided into about a dozen sub-categories based on stock market combinations such as sector, market capitalisation, value or dividend, etc. For investors, this categorisation is a good starting point to navigate across equity-oriented funds based on their risk tolerance.

Each fund type is associated with a specific risk. For instance, large-cap equity schemes are moderately less risky compared to the small-cap fund which comes with a high-risk tag. This approach helps investors choose an MF scheme based on their investment time-frame and risk-taking ability. If you haven't seen the categorisation document, do look it up on the SEBI or AMFI (Association of Mutual Funds in India) websites to understand how equity-oriented schemes are classified. Once you are conversant with it, you will be able to relate to how funds reacts to stock market changes. You will also be able to appreciate why MFs are a better way to have exposure to the markets than directly investing in stocks (see 9 advantages of investing through MFs).