Volatility is the testing time that every investor must face. Today, there’s volatility in the stock markets and the common man’s investment portfolio is experiencing turbulence. Investors are not sure how to manage their portfolio as their losses mount.

Recent investments in small and mid-cap mutual fund schemes have turned red. In the bond market, long-term debt funds are also getting crushed by a hard upward movement in interest rates. It is crucial at this point that investors do not commit mistakes out of panic.

With much volatility and risk in the markets, it is essential to remain focussed on your financial goals. Let’s find out how you can steer these turbulent waters, minimise losses, and continue steadfastly towards your money goals.

Do not panic

When the stock markets are volatile, panic among investors induces mistakes. Often investors fear that they may lose their entire holdings if the markets continue to fall the way they have been.

In panic, an investor may commit such mistakes as liquidating his entire investment, thus compromising on his financial goals. Turbulence calls for calm heads. It’s critical you remain patient and avoid herd mentality.

Focus on the reasons you made your investment and remember the goal it was supposed to help you achieve. Let the goal be your lighthouse.

Assess your risk appetite

Stock markets reward risk takers. The higher the risks, the higher the potential rewards — and higher the potential for losses, too.

Your recent returns from equity mutual funds may be dreadful. But ask yourself if you can absorb the impact of these losses. Your ability to absorb these financial shocks is your risk appetite.

At this point, assess your risk appetite. Can you absorb the shock of further losses? If the answer is ‘no’, cash out. If the answer is ‘yes’, and that may be because you don’t need to redeem this investment immediately, remain invested.

Similarly, in a situation such as this, you may find that an equity investment may not be ideal for achieving short-term goals which require liquidity in the near term. Therefore, switch to safer investments such as bank fixed deposits or liquid mutual funds.

Review investment strategy

Do not redeem your investment unless you've achieved your goal, or if there's an urgent need for liquidity. The downturn in the current scenario may reduce your immediate returns, but it also gives you an opportunity to accumulate mutual fund units or shares at lower prices, which will help in the achievement of your long-term goals.

The current volatility is also a chance for you to assess your investment strategy. SIPs (Systematic Investment Plans) can keep you close to the profit line, so you should try to continue your SIPs at such a time. Avoid lumpsum investment unless you are confident about your decision or if your investment view is for the long term.

Avoid unnecessary risk

A falling market wrecks your equity profits. However, to the intrepid investor, it also presents immense possibilities. That said, there are a few things most investors should not attempt due to the risk of losing their hard-earned money. For example, do not invest money that you may need in the near term. For example, you may need to buy a motorcycle in six months and have saved for it. It’s best not to risk money allocated towards a goal towards the equity market just because there may be the possibility of short-term profits.

Similarly, avoid borrowing to invest in equity markets. Your finances may be severely impacted if the markets fall further.

Time to rebalance portfolio

If you want to play a wait-and-watch game, rebalance the equity and debt ratio in your portfolio. Usually, you may invest in equity and debt in a fixed ratio, i.e. 70:30, 60:40, 40:60 and so on.

In the short term, when the market is volatile, you may want to hold on to your cash reserves in safe investments like a bank fixed deposit or a liquid mutual fund.

For long-term investing, continue to invest through the SIP mode or in instalments to average out investment purchase price. Some of your recent FDs booked at lower interest rates can now potentially perform better with interest rates gradually rising.

Therefore, you can switch out from low interest to high interest deposits. Also, for any long-term investment plans, always diversify your portfolio adequately. Rebalancing your investment portfolio can help you to reduce risks, lower losses, and recover quickly once the market situation normalises.

When in doubt, always reach out to an investment adviser. Periodic volatility may need you to take a few difficult decisions such as extending the tenure of your goals, or cutting down on your returns expectations. Some medicines may taste bitter, but they will help your portfolio recover quickly.

The writer is CEO, `BankBazaar.com`.