Should new equity investors move to debt funds?

I started investing in equity funds through SIP three years ago. Should I be concerned about a potential market crash and shift to debt funds, or should I see a crash as a chance to invest more? - Anonymous

Firstly, worrying won't do you any good. Imagine if you were anxious in 2020, during the Covid-19 market crash and moved your investments from equity to fixed income. Yet, since then, the market has delivered a strong performance, surprising many.

The Sensex gave an annualised return of over 15 per cent since the beginning of 2021. While it may fluctuate in the short term, it has delivered solid returns over long time periods. Had you exited your investments in panic at the time, you would have missed such a unique growth opportunity. So, concern without a clear strategy only leads to lost opportunities.

Here's what you should do instead.

1. Stick to your long-term plan: If you don't need the money for the next 10-15 years, staying invested is often the wisest move. As you've been investing for just three years, your portfolio is still in the early accumulation phase. During this time, market dips are simply part of the journey. Trying to time the market is tricky and can lead to missing out on the best days of the market, as seen in recent years. While corrections are normal, the timing of both crashes and recoveries is nearly impossible.

2. Focus on what you can control: Instead of being concerned over downturns, concentrate on your financial goals and time horizon. Knowing how long you'll stay invested allows you to better prepare for market fluctuations. Over time, as your investment grows, consider creating an asset allocation plan to weather market volatility.

3. Develop a balanced strategy: Once your portfolio becomes more substantial, think about an allocation method. For example, you could aim to park 25 per cent of your investments in fixed income. If this allocation falls or rises by, say, 5 per cent, rebalance by moving funds between equity and fixed income to maintain your chosen balance. Until then, continue investing consistently and allow your portfolio to grow without interruption.

To reiterate, avoid reactive moves based on short-term events. Instead, focus on a balanced, disciplined approach that aligns with your long-term goals. This way, you're prepared to benefit from the market's natural ups and downs.

Also read: Should I move my investments from an equity fund to a liquid fund?