In 2025, build a diversified equity portfolio SIP by SIP

When the stock market turns volatile, many investors find it difficult to hold on to their investments. A few investors pause their systematic investments. The mind is designed to avoid loss, and many investors find it difficult to digest even marked-to-market loss due to falling stock prices. In a volatile market, investing becomes tougher. Investors, however, can use volatility to their advantage. Here are a few practical lessons:

No Panic Decisions

Securities markets tend to go through rough phases. Investors should be mentally prepared for such a phase. Falling stock prices and the resulting downward-trending net asset values of the mutual fund schemes are no aberration. It has happened in the past and will happen in the future. When volatility strikes, avoid selling in a panic. Instead, take stock of the situation by figuring out two things: the risk-reward associated with the portfolio the investor holds and the risk-taking ability of the investor.

An investor should figure out her ideal asset allocation in light of her financial goals and risk-taking ability. For example, for an aggressive investor looking to fund long-term financial goals such as retirement, it makes sense to allocate more to a multi-cap or flexi-cap equity portfolio. However, for an investor keen to invest for a short term-say, a year or two-it makes sense to restrict her investments to fixed-income instruments only.

Even within asset classes, allocations to sub-segments should be checked.

For example, an aggressive investor may be comfortable holding a large allocation to a small-cap equity scheme. However, an investor with a moderate risk profile looking to invest in equities should be better off holding a large-cap oriented equity portfolio.

This assessment should help investors figure out if there is a mismatch between the ideal portfolio they should hold and the portfolios they are holding.

Take Corrective Steps

A mismatch is usually cause for concern for most investors, and acting on it can ensure peace of mind. If an investor is over-allocated to equities, then she should switch to less volatile asset classes such as fixed income. Moving from high-risk segments, such as small-cap equity funds or sectoral schemes, to large-cap oriented equity funds can reduce risk for investors over-allocated to equities.

Diversify, Be Disciplined

Among most investors heavily invested in equities, those who panic first are those who run concentrated equity portfolios. Direct equity investors in stocks of companies with questionable fundamentals may face maximum heat.

Hence, investors should opt to build a diversified equity portfolio comprising stocks of companies with strong fundamentals. Most investors may not have the time, skill, or the orientation to do so. In such circumstances, diversified equity schemes—multi-cap, flexi-cap equity schemes-can offer the solution. Investors with moderate risk profiles may be better off investing in multi-asset funds and aggressive hybrid funds.

Investing across asset classes does not mean the investor loses an opportunity to earn high returns at portfolio levels had she invested only in equities. Diversified portfolios not only contain downside but also offer healthy risk-adjusted returns in the long term.

Mutual funds offer regulated investment vehicles to invest across asset classes with a disciplined investment approach. These professionally crafted portfolios are more likely to withstand volatility compared to those designed by amateurs.

Stagger and Scoop Up

Novice investors finding it difficult to invest in a volatile phase should note that volatility at the time of investment tends to reward in the long term, as it reduces the average cost of buying. Hence, continue with systematic investment plans (SIPs). Investors continuing with their SIP should aim to add more on sharp declines.

These incremental investments over and above the SIP tend to boost the corpus size over the long term. Rather, volatile phases are the best to begin investments for first-time investors. Investors keen to deploy a large lump sum in equities can route their investments through a systematic transfer plan (STP).

To sum up, volatility can be the best friend of a long-term investor. It can offer opportunities to own quality portfolios at throwaway prices.

Over a period of time, downward volatility recedes as the macroeconomic situation improves and corporate earnings growth catches up. Stock prices respond, and the NAV of mutual fund schemes looks up. An asset allocation-driven approach to investing can be a long-term solution to navigate volatility in the stock market and create wealth over a period of time.

Views are personal, the author is Radhika Gupta, MD & CEO, Edelweiss Asset Management Ltd. Mutual fund investments are subject to market risks; read all scheme-related documents carefully.