Here's how MF investors can navigate market falls

ETMutualFunds.com asks mutual fund experts and financial planners every week for a list of frequently asked queries by investors. Often, these questions would be very topical, something that may be worrying many regular investors. The idea is to present the questions and the response of the advisors/expert to those questions for the benefit of our readers. This week we spoke to Arun Kumar, Head of Research at FundsIndia.com, to get answers to the most frequently asked questions about the market fall after a huge post-budget rally.Questions asked by investors:1.Sensex has fallen 1000 points. Is this the beginning of a market crash?2.Is this the time to add to equities or should we be cautious?3.How should one take tactical calls in this market?His response to the clients:Historical data suggests that equity markets had a temporary fall each and every year. 10-20% temporary fall is almost a given every year. There were only 4 out of 42 years where the intra-year fall was less than 10%.While the equity markets go up over the long run driven by the underlying earnings growth, the near term is filled with several temporary declines. The Sensex touched a peak of 50,000 a few days back. Since a 10-20% intra-year decline in equities is common, Sensex falling to 45,000-40,000 levels should be a normal part of expectations.What should you do in times of small and big falls?Assume you cannot predict a crash – put in place an asset allocation mix which allows you to endure the declines and stick to the plan without the need to predict and step out of a crash. A 100% equity exposure implies being okay with a 50-60% temporary decline once every 7-10 years. Most of us won’t be able to handle such a large fall and may panic out of our portfolios. So the idea is to add fixed income to soften the blow during market crashes.The percentage of fixed income in your portfolio has to be decided based on the extent of declines you can tolerate – the lesser the decline you can tolerate the higher the fixed income allocation. The overall split between equity and debt in your portfolio is by far the most important determinant of your long term returns.Rebalancing the portfolio once a year back to original asset allocation when equity allocation deviates by +-5% keeps the portfolio declines under our expected levels. Rebalancing also tends to improve the return potential by 0.5% to 1.5% over a market cycle – as this is a simple mechanism to buy low-sell high!Build an “equity market sale” plan: Demarcate a portion of your debt allocation as ‘opportunity bucket’ to be deployed into equities if the market corrects more than 20%. Preload the decisions on how you will deploy the money –• If Sensex falls by ~20% (i.e 40,000) – Move 20% from debt portion (intended for tactical allocation) to equities.• If Sensex falls by ~30% (i.e 35,000) – Move 30% from debt portion (intended for tactical allocation) to equities.• If Sensex falls by ~40% (i.e 30,000) – Move 40% from debt portion (intended for tactical allocation) to equities.• If Sensex falls by ~50% (i.e 25,000) – Move 10% from debt portion (intended for tactical allocation) to equities.*This is a rough plan and can be adapted to based on individual’s risk profile.Build a valuation driven framework to partially reduce equity exposure when markets become insanely expensive. Diversify across investment styles, geographies, large/mid/small cap. Provide the portfolio enough time (preferably 10+ years) and have patience.

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