How should MF investors deal with a stock market correction?

Usually, stock market recoveries tend to be sudden and sharp. If you have exited your equity funds, you will be left on the sidelines. By the time you re-enter, it will be too late and your returns will lag behind that of the market.

A better way to handle stock market corrections is to stay invested, especially if the money you have put in equity funds is not needed for the next five or seven years.

Don’t stop your systematic investment plans (SIPs) during a market correction. Each instalment of the money invested will buy a higher number of units during a downturn. This will boost returns over the long-term.

Make sure your portfolio is well diversified. In addition to equities, it should also hold debt and gold funds. Having uncorrelated assets in your portfolio will reduce the hit you suffer. Gold typically does well when equities are underperforming. And bond funds do well when the central bank starts cutting interest rates in response to an economic or market downturn.

Within the equity portfolio, make sure you have exposure to international funds as well. Different geographies perform in different calendar years. Developed market equities in particular tend to have a low correlation with the Indian market. The quantum of downturn suffered by different markets also varies, and that too will cushion the hit to your portfolio.

Your portfolio should also have exposure to different styles of funds. Typically, growth funds tend to do better in bullish conditions, while value-oriented funds do a better job of protecting downside risk.

Next, check your exposure to mid-and-small-cap funds. Typically, these funds outperform during a bull market and also decline heavily during a downturn. While you should have exposure to them to garner the alpha they are capable of generating, it should be limited.

70 per cent to large caps, 20 per cent to mid-caps, and 10 per cent to small caps is a good exposure for retail investors with moderate risk appetite. Finally, ensure that your exposure to sector and thematic funds is limited. Exposure to a single sector or thematic fund should not exceed five per cent of your equity portfolio. Cumulative exposure to all sector and thematic funds should not exceed 10-15 percent of the equity portfolio.