Portfolio in red after moving from FDs? Expert shares how to handle volatility and allocate smartly

Synopsis

A Gujarat-based investor, new to equity mutual funds after years in fixed deposits, faces initial losses but shows courage to invest further. Experts advise focusing on asset allocation across market caps rather than changing existing sound funds. Additional investments should be channeled into current flexi-cap and multi-cap schemes, with lumpsum considered if comfortable with volatility.

Shifting from traditional investment options like fixed deposits to equity mutual funds is a significant step for many investors seeking higher long-term returns. While equities offer better growth potential, they also come with short-term volatility that can unsettle first-time investors. Understanding market behaviour, staying disciplined during downturns, and having a clear allocation strategy are crucial to navigating this transition effectively.

The same is the case with a 45-year-old investor from Gujarat and a viewer of The Money Show on ET Now, who had primarily relied on fixed deposits but recently shifted nearly Rs 10 lakh into equity mutual funds since August 2024.

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Her portfolio includes a mix of flexicap, multicap, and smallcap funds, with investments made through both lumpsum and SIP routes. She has invested in Nippon India Vision Fund around Rs 7.15 lakh, HDFC Flexicap around Rs 3 lakh, Quant Smallcap Fund around Rs 10,000 going on, and SBI Multicap Fund around Rs 33,000.

However, with markets witnessing volatility, her portfolio is currently in the red. Despite this, she plans to invest an additional Rs 4 lakh and is seeking clarity on how to allocate her investments across different market capitalisations.

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According to Harshvardhan Roongta, this move from fixed deposits to equities is a positive and well-intentioned decision. He points out that it is quite common for new investors to see losses in the initial phase of equity investing, especially during volatile market conditions. What stands out, however, is the investor’s willingness to continue investing despite these losses, reflecting a growing understanding of how markets function over time.

“So, you have to see this entire picture in totality to understand that a new investor walking into mutual funds from a fixed deposit, first experience in mutual funds, over a year-and-a-half says that she is incurring a loss and she has the courage right now to invest into markets for whatever reasons as lump sum,” the expert said.

Should you invest more when markets are down?

Roongta explains that market corrections are a natural part of the equity cycle and should not be a cause for panic. Investors often react emotionally to short-term losses, but those who understand the long-term nature of equity investing are better positioned to make rational decisions.

If an investor has conviction in the markets and a clear understanding of risks, adding more money during periods of decline can actually work in their favour over time. However, such decisions should be guided by a structured plan rather than impulsive reactions to market movements.

Also Read | SIP or lumpsum? Expert suggests best approach for first-time mutual fund investors with Rs 10,000

Focus on asset allocation, not just fund selection

Reviewing the investor’s portfolio, Roongta notes that the existing mutual fund schemes are fundamentally sound and do not require changes at this stage. Instead, the focus should shift towards defining a clear allocation strategy across market caps.

He emphasises that investors must first decide how much of their total equity exposure they want to allocate to large-cap, mid-cap, and small-cap funds, based on their risk appetite and financial goals. “there is no need to make any changes in her portfolio with regards to the schemes that she has. However, what she will need to start doing now further is that she will need to start deciding what allocation she wants to make to a largecap category, how much she wants to make in midcap, how much smallcap,” the expert said.

For instance, a relatively balanced investor may prefer a higher allocation to large caps for stability, while a more aggressive investor may choose to increase exposure to mid and small caps for higher return potential. Establishing this allocation framework helps bring clarity and discipline to the investment process.

Roongta further highlighted that first drawing up the plan as to how much goes into which category and then picking schemes accordingly is the prudent approach.

How to invest the additional Rs 4 lakh?

With regard to the additional investment of Rs 4 lakh, Roongta suggests that the investor should avoid complicating the portfolio by adding new schemes. Instead, she can continue with her existing funds and allocate the fresh investment between her current holdings, such as the flexi-cap and multi-cap funds.

“I would suggest she splits it into two schemes as she already has. One is an HDFC Flexicap, the other an SBI Multicap Fund. Now, this is how she could invest her fresh money,” the expert said.

If she has confidence in the long-term prospects of the market, she may consider investing the amount as a lumpsum to take advantage of current valuations. However, this decision should align with her comfort level and understanding of market volatility.

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This case underscores an important lesson for investors transitioning from fixed deposits to mutual funds. Experiencing short-term losses is a normal part of equity investing, and reacting with panic can often do more harm than good. A disciplined approach, backed by proper asset allocation and a long-term perspective, is essential for building wealth in equities. By staying patient and consistent, investors can turn periods of market volatility into opportunities for long-term growth.

(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of The Economic Times)

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