Types of Mutual Funds in Bear Markets

Market cycles are part and parcel in terms of mutual fund investing. Most often, the growth phase follows corrections or bear-market phases. If young professionals or budding investors out there would like to understand how different types of mutual funds behave during a bear market, this article is for them. This will tell them which types of mutual funds generally perform during bear markets and how trading hours in India and MCX holidays might sometimes impact their strategy.

Bear Markets and Mutual Funds Defined

The dictionary defines a bear market as a negative phase, where stock prices usually drift downwards by about 20% or more from recent highs. Such phases usually scare investors. However, mutual fund types differ, and not all of them are affected in the same way. Some mutual fund types might have been structured to tackle the risk during such phases more effectively.

Bear-Market Specific Mutual Funds

Here are some mutual funds that investors commonly nominate during a market downturn:

1. Debt Mutual Funds

Debt mutual funds expose investors to fixed-income securities in government securities, bonds, treasury bills, etc. Being quite less related to the performance of the stock market, these types of funds probably experience lesser volatility in a downturn market. That’s why young professionals, who are a bit apprehensive about going through really bad times, include debt funds among their strategies while investing in mutual funds.

2. Liquid Funds

Liquid funds resemble sub-categories of those debt mutual funds, which invest only in very short-term instruments of the money market for their investments. The focus of liquid-fund schemes is to maintain adequate liquidity, with more or less stable returns. During a bear market, investors looking for temporary safe havens for money without exposure to equities often turn to liquid funds.

3. Gold Funds

Some investors even turn to gold funds under such uncertain market conditions. Here, those funds invest in instruments related to gold and are expected to reflect the price of gold. Historically, gold has served as a safe-haven asset during economic downswings, which probably explains why gold funds form part of some strategies for mutual fund investing during a bear phase.

4. Balanced Advantage Funds (BAFs)

Balanced Advantage Funds are hybrid funds that dynamically shift between equity and debt according to market circumstances. For example, the Equity Exposure reduces during a bear market while increasing the Debt; therefore, it provides some flexibility in this type of mutual fund.

5. Arbitrage Funds

The returns from the differences between the cash and derivatives markets achieve the objective of arbitrage funds. In declining and volatile markets, these funds may still manage to show stable returns because their strategy does not depend entirely on the direction of the market.

Trading Hours India and MCX Holidays: Influence on Strategy

Investors generally think of mutual fund investing as long-term; however, trading hours in India, as well as MCX holidays, remain relevant. For example:

The profitability of the mutual fund NAVs undergoes calculations based on the price closes from stock exchanges that include NSE and BSE. Thus, if any MCX holiday or a national holiday occurs during which the markets are closed, NAV updates delay. If investors redeem or purchase on holidays, these requests process the next working day. This could matter in the context of very volatile bear market phases, where even one day may count in terms of entry or exit timing.

How Young Professionals Should Approach Bear Markets

A bear market can stress young professionals, especially if they have just started investing in mutual funds. Instead of reacting emotionally, it might help to do the following:

Diversify across different mutual fund types.
Understand their risk tolerance and choose funds accordingly.
Track trading hours in India and MCX holidays for better planning.
Seek Professional Advice. Seeking such professional advice would also benefit the investor.
Bear markets just form part of the investment journey. With an understanding of how the different types of mutual funds behave, investors will be able to manage their portfolios even more confidently.