Mutual Fund Investing in down Markets


Investor psychology is the same everywhere. Investors shy away from investments in down markets more out of panic than logic. Conventional wisdom suggests that you should invest more of your money into mutual funds when the market is down because it gives you the benefit of currency cost averaging. Investments in mutual funds are beneficial when your time horizon is five years or more.

Fund managers have a torrid time in down markets because they have to contend with sudden redemption pressures as most investors rush for the exit door at the first sign of panic in the markets. This creates instability in a fund in the short term and most funds employ survival strategies to keep their boats afloat. The last major market crash of 2007-08 clearly demonstrated this as mutual funds across the board suffered from the ‘withdrawal symptoms’ of shaken investors, including the so-called informed investors.

Markets go through boom and bust cycles but patient investors have always been rewarded by the top mutual fund families. In down markets, fund managers are able to pick up fundamentally strong companies at bargain prices. So investors with a longer time horizon stand to gain as these stocks appreciate sharply as sentiment improves and markets make a strong rebound. Smart fund managers believe in holding on to value stocks which pay handsome dividends in the long run.

Instead of selling your fund at the troughs and buying at the peaks, you should be buying more of your mutual fund at troughs so that you can leverage on the gains when the market is peaking.

If you are a long term investor and have investments in mutual funds, it makes sense to deposit your money regularly with your trusted mutual fund. Investing fixed amounts through systematic investment plans of mutual funds is the wisest thing you can do to grow your money over a three to five year time horizon.

All mutual funds with a decent track record and expertise in fund management have the systems in place to not only meet investor expectations but even exceed them with a fair degree of consistency.

Compare your mutual fund with its peers on different performance parameters and you can decide whether to stick to it or go for a switch. A mutual fund company which has a large number of funds in the top quartile in terms of returns is the best equipped to weather the storm in the financial market.

It is also widely acknowledged that the best fund managers in business have the ability to weather storms in the financial market. The recent financial crisis affected equally different asset classes- equities, mutual funds, fixed income, government bonds, real estate and commodities. It highlighted once again the need for disciplined and informed investing.

Professional money managers do just that. If you have selected the right mutual fund which matches your risk-return profile, there is no reason to worry or fret over your investments on a day-to-day basis. The short term market volatility gets ironed out over a period of time. Disciplined investing does pay in the long run.