There’s a big question in the minds of mutual fund investors is: Should one average-down when the markets are falling?
It’s been a volatile last few weeks, and equity prices have tumbled back to levels where they were seven months ago in July 2017. Stocks have lost significantly, and equity mutual fund investors are also seeing red marks in their portfolio’s performance, particularly investors who have just entered stocks.
In fact, on 16th March, the BSE Sensex lost over 500 points. Social media lost no time in calling the day of the carnage as FRY-DAY.
When averaging down works
If you are a mutual fund investor, and you are in it for the long haul, the best thing you should do is add a sizeable quantity every time the stock market falls considerably. For example, if equity assets are down 10 percent every time, you could add another 10 percent to your mutual fund investments.
So say that you have a portfolio of Rs 1 crore, and the market tumbles 10 percent. Add another Rs 1 lakh of investments.
There are three advantages to this strategy. Not only do you get to invest in your favourite funds at lower levels, you will slowly and steadily build a sizeable corpus in mutual funds.
Thirdly, when prices fall, investors can buy a higher quantity of investments for the same amount. Simply put, investing Rs 1 lakh at 10,000 levels will fetch you a higher quantity than investing Rs 1 lakh at 11,000 levels.
Investments made when equity prices are lower will always be profitable in the long run.
However, remember that equities may remain at lower levels for a long time, and could frustrate your staying power in the market.
At such times, avoid looking at the net asset values of mutual funds all the time. Instead keep a laser sharp focus on accumulating good funds every time the market crashes.
And when it won’t
Of course, this strategy will only work best if you wait for the next upside. Just in case the market falls lower and you are tempted to cash out, this strategy will see you lose more money.
So ensure that you stay the course, and invest only if are willing to slog it out till the next wave starts to lift your funds net asset value.
