Staying Invested in Small Cap Mutual Funds: A Long-Term Strategy Amidst Market Volatility
Investing in small cap mutual funds can be a rewarding endeavor for those who adopt a long-term strategy. However, it is natural to face challenges such as market volatility and short-term losses, as experienced by many investors, including myself. I have been investing in the HDFC Small Cap Mutual Fund on a monthly installment basis for the past two years, but have recently faced a loss of approximately 12,000 rupees. This article will explore whether it is advisable to take the loss or continue your investment, emphasizing the importance of patience and strategic planning in the world of equity markets.
Understanding the Current Market Scenario
The current market conditions are influenced by global events, such as the ongoing corona pandemic, which has significantly impacted several businesses. Due to the pandemic, many companies are facing financial difficulties, causing market volatility. However, it is important to remember that the world is not without solutions or options, and finding a way to overcome such challenges is definitely on the horizon.
The Significance of Patience and Long-Term Investing
When investing in small cap mutual funds, it is crucial to exercise patience and maintain a long-term perspective. Small cap businesses experience remarkable growth after a period of around 7 to 8 years. Despite the present market downturn, it is advisable to continue your monthly investments, as this will help you to average out the cost per unit. By maintaining your investment, you can achieve better returns over the long term.
Advantages of Persisting with Small Cap Mutual Funds
Investing in small cap mutual funds requires a commitment, as these are typically long-term investments. It is recommended to keep such investments for at least 10 to 12 years. Other than the HDFC Small Cap Mutual Fund, most other small cap funds have also faced similar challenges in the current market. However, this situation is not expected to last indefinitely. Once the pandemic subsides, the market is expected to rebound, and small cap businesses are likely to start earning substantial profits.
Addressing Short-Term Concerns and Future Prospects
It is understandable to feel concerned about short-term losses, especially when you have been consistently investing for two years. However, market volatility is a normal part of investing. The current market downturn is a temporary phase, and the effects of the pandemic will eventually diminish. Therefore, your investments will have the opportunity to improve and generate positive returns in the future.
Considerations for Future Investors
Market conditions are expected to remain volatile for another 1 to 2 years following the pandemic. However, this is not a permanent state. After the immediate impacts of the pandemic are resolved, the market will likely stabilize and begin to rise again. Therefore, it is essential to retain your investment stance and embrace the cyclical nature of the market.
Alternative Investment Strategies
While it is important to maintain a long-term outlook, there are alternative strategies available for those who are wary of the risk of further losses. If you believe that the worst is yet to come and the possibility of negative returns is high, you may consider booking the loss and shifting to a multicap mutual fund. Alternatively, you could choose to wait it out and remain invested, allowing your investments to potentially recover and generate better returns in the long run.
Ultimately, the decision to continue or exit your investment in small cap mutual funds is a personal one. It is important to carefully evaluate your risk tolerance, financial goals, and investment horizon before making a decision. Regardless of the outcome, patience and strategic planning are key to achieving success in the world of investments. Best of luck with your mutual fund journey!