Mutual Fund Q&A: The value of my SIP portfolio is down 20-30% in the current market crash. What should I do?

The value of your SIP is down by 20-30%, but this presents a great opportunity for SIP investors. One important point to recognise is that SIPs perform well during market cycles, including upward and downward movements. You pay higher prices when you invest in a growing market through an SIP.

Conversely, your SIP accumulates more units in a falling market because you purchase at lower prices. Therefore, this is an excellent time to continue with your SIP.

I understand that the current 20-30% decline can be concerning, but this is precisely why rupee-cost averaging works. Rupee-cost averaging is a strategy where you invest a fixed amount of money at regular intervals, regardless of market conditions. This means you buy more units when prices are low and fewer units when prices are high, which can help reduce the impact of market volatility on your investments.

You're better positioned for future gains by participating in the market during the ups and downs. While it's true that SIP investments may show negative returns in the short term, they are meant for the long haul. The SIPs you invest in today will likely yield significant returns over an extended period.

Therefore, I encourage you to keep up with your SIP contributions and, if possible, consider increasing them. Additionally, there are ways to protect a portion of your mutual fund from significant losses during the current market downturn. One strategy is investing in hybrid funds if you're uncomfortable with market volatility. Hybrid funds typically allocate over 35% of their assets to debt, with the remainder invested in equity.

There are various types of hybrid funds, such as balanced, balanced advantage, and equity savings funds. While they are not fully equity funds, they provide some equity exposure and tend to perform better than pure debt funds during market declines. For instance, if the market drops by 10%, these hybrid funds might fall by only 5%, 3%, or even 2%. However, no equity fund can fully protect you from the current market decline.

Regarding your question about how to have prepared in advance for this crash, it's important to understand that only time can tell when markets will fall, and there’s no guaranteed way to shield yourself completely. However, one crucial strategy is asset allocation. This involves adjusting your investments to maintain a balance between equity and debt.

For example, if you initially decided that 80-85% of your investments would be in equity and 15-20% in debt, that allocation may have shifted due to a market rally, pushing your equity exposure to 90%. If you had proactively reallocated 10% from equity to debt when your equity values rose significantly, that would have been a prudent strategy. Always aim to maintain proper asset allocation, especially if you don’t have someone to guide you with your investments.