India-Pakistan Tensions: How should mutual fund investors respond to navigate geopolitical risk?

With rising geopolitical tensions between India and Pakistan, mutual fund experts are urging investors to stay calm, avoid making impulsive decisions and should continue with their ongoing SIPs as they are structured precisely to navigate market volatility by averaging out purchase costs over time and avoid lumpsum investments.

“Mutual fund investors should continue to invest through SIP. They should never be paused during geopolitical uncertainty as it is good for rupee cost averaging. Lumpsums should be avoided. There will be opportunities for it in future, if the situation escalates further,” said Rajesh Minocha, a Certified Financial Planner (CFP), Founder of Financial Radiance.

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Another expert believes that uncertainty often triggers fear-driven reactions, especially in the financial markets, where volatility can spike and sentiment can shift rapidly and during periods of heightened geopolitical tension, it is quite natural for investors to feel unsettled.

Adhil Shetty, CEO of Bankbazaar.com recommends that when it comes to mutual fund investments, especially Systematic Investment Plans (SIPs), it is advisable not to halt your contributions as SIPs are structured precisely to navigate market volatility by averaging out purchase costs over time and pausing them due to temporary uncertainty could actually mean missing out on opportunities to buy units at lower prices, potentially weakening long-term returns.

He further adds that if you have a substantial sum to invest, consider deploying it through a Systematic Transfer Plan (STP) into equity funds over several months as this staggered deployment cushions your investment from short-term market shocks and aligns better with prudent risk management during volatile times.

Many market experts believe that gold is considered a hedge against inflation and with global economic conditions remaining uncertain, gold is expected to retain its appeal as a hedge against market instability.

On the other hand, international funds cater to different broad international markets, commodities, foreign indices, among others and to sum it up, the performance of the scheme will depend on under which geography your money is invested. That means you should pay extra attention to your investments in international funds. Pay extra attention to which geography or indices you are investing in.

The important thing to note here is that whether gold and international funds act as a hedge in times of geopolitical instability and if yes, what allocation one should have in their portfolio at this particular time?

Both the experts recommend up to 10% of allocation in gold either through gold ETFs, sovereign gold bonds or multi asset funds.

Shetty of Bankbazaar mentions that both gold and international mutual funds can serve as hedges during periods of geopolitical stress and gold, in particular, has long been regarded as a 'safe haven' asset, and recent trends have reinforced its role as a shield during uncertainty therefore, allocating around 5% to 10% of your investment portfolio to gold, either through gold ETFs or sovereign gold bonds, can offer diversifications when equity markets are under pressure.

Similarly, for international mutual funds, he mentions that these funds provide diversification, reducing your portfolio’s dependence on domestic markets therefore with equities facing headwinds due to regional tensions, exposure to developed markets can lend resilience to your investments and a balanced allocation to international funds, typically around 10% to 15%, depending on your risk appetite and goals, can be considered.

To this Minocha adds that though gold is a good hedge whenever there is political stability but it has run up significantly over the past few months and the exposure in gold can be taken through multi asset funds. “Overall it can constitute about 8 to 10% of the total portfolio. Unfortunately, the window for international funds investing in mutual funds is still not available,” Minocha adds.

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Investment in equity mutual funds is majorly done with a long-term financial goal. But with short term uncertainty due to conflicts the important thing to take care of is not derailing your long-term financial goals, is what experts believe and additionally if your goals are five to ten years away or more, temporary market corrections are unlikely to cause lasting damage.

Minocha advises that investments for long-term financial goals should continue through diversified equity funds and short-term conflicts like these happen many times over a long-term investing journey therefore investors should not get perturbed.

The other expert recommends that it's wise to revisit your asset allocation and ensure it remains appropriate for your current stage of life and risk tolerance and a diversified portfolio help you stay on course and additionally regular portfolio reviews and rebalancing can ensure your investment plan stays aligned with your long-term objectives, even as short-term conditions fluctuate.

There are many first-time investors who are willing to allocate in the categories which offer high returns, have low or high risk, and offer tax benefits. Additionally there are existing investors who are willing to start new investments but are confused whether to postpone their fresh investments or move further to do the investments.

To this both the experts recommend that rather than postponing investments, one should focus on building a disciplined plan, markets will always have their share of uncertainties, but with a good strategy in place, you can overcome them effectively.

Shetty advises that uncertain times shouldn't necessarily deter new investments, but they do call for a thoughtful and strategic approach and for existing investors, it’s advisable to stay invested and avoid knee-jerk reactions and if your current funds are well-chosen and aligned with your goals, continuing with your SIPs and reviewing your portfolio periodically should suffice.

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For new investors, the CEO of Bankbazaar recommends that starting with SIPs in diversified equity mutual funds is a prudent choice as this approach ensures you enter the market gradually and avoid the risk of poor market timing plus it’s also advisable for beginners to steer clear of volatile themes.

With a similar opinion, Minocha adds that long term investments should be done in equity based diversified investments through SIPs and STPs, short and medium term investments should be done through debt and hybrid funds like arbitrage funds and investors should continue to invest based on their goals, time horizon and risk appetite.

(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of The Economic Times)

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