Hedging Using Mutual Funds During Economic Downturns

Economic Downturn

Let’s face it: economics sounds just like some topic that your relative goes on and on about, from one family dinner to the next. But what if I told you just a few simple things about mutual funds that could help you hoist tough periods like a ninja of financial net worth?

If you’re in your twenties and just earning your keep, this is for you.

What is an Economic Downturn Anyway? 

You’ve just taken a crazy roller coaster ride. You know, one of those twists-and-turns ones with the horrible feeling inside your stomach. On the way, the booming economy-everyone’s cheery. Jobs are plentiful, stocks skyrocket, and your crypto wallet is lit up like a bonfire.  

Then comes the economic downturn. This is when:

• Companies make less money and even shut down 
• People get laid off 
• The stock market is red 
• Inflation peaks or demand plummets 

8 Ways Mutual Funds Will Help Survive the Economic Downturn: 

• Diversification: Don’t Put All Eggs in One Basket

As a matter of fact, mutual funds spread your money across different asset classes i.e., stocks, bonds, and sectors. This is called diversification. 

Why it matters: if one company or sector crashes (say tech), your investment doesn’t fall to pieces; other sectors (like healthcare or FMCG) might still be doing well. 

• Smart Asset Allocation: The Balance Between Risk and Safety 

A good mutual fund manager gets to keep your money balanced across asset classes- equity for risky investors, debt for safety and gold as a classic hedge. 

Defensive constructions of funds are the portfolio camp at these times. It’s akin to changing your car’s settings to “eco-mode” to save fuel. 

• Invest in Defensive Funds 

Defensive funds target healthcare, household discretionary and utilities. Most people always need to use medications and shampoo, even when the economy is doing poorly. 

Example types of funds: 

• Mutual fund under the FMCG category
• Mutual fund under the healthcare category

Such frameworks are believed to be recession-proof, so they do not lose much of their value during downturns. 

• Bond Funds: The Laid-Back Sibling of Stocks 

Debt mutual funds invest in fixed-income securities such as bonds, which are issued by the government or by corporations. These yield fairly stable returns, as well as provide a cushion in downturns. 

In an economic slowdown, debt funds can shelter investors while the stocks throw their tantrums. 

• Gold Funds: The OG Hedge 

Gold survives all crises. Gold mutual funds or gold ETFs (exchange-traded funds) let you own gold without buying actual jewelry or bars. Gold prices drastically increase while stock market prices tumble during COVID, the 2008 financial crisis-so, enough said.

• Reconfigure Sector Rotation Strategy

The typical working of some mutual funds involves active switching of an investor’s money among different industries based on whether it is doing well or not using the example of most technological and manufacturing companies during growth years and most healthcare, utilities, and banking companies during downturns. You don’t have to do the move; fund managers are doing it!

• Dividend Paying Funds = Passive Income 

Sometimes, companies pay dividends to their shareholders after accumulating profits. This means that dividend-paying mutual funds will also provide a steady cash inflow, even when the stock price is not seeing any major growth. Think of it as little “it’s going to be okay” notes that your investments are sending you in hard times.

Example: Meet Aditi, Digital Marketer

This is Aditi. She started investing in mutual funds with a monthly investment of ₹5000, packaging them into different ratios. 

50%- Equity Mutual Funds

30%- Bond Funds

10%- Gold Funds 

10%- Dividend Focused Funds

The market went red when COVID struck. Yes, her equity funds dipped during the pandemic, but her bond and gold funds performed well. 

Dividends were helpful in paying off some bills. She did not panic-sell, and the diversified strategy, along with the high cash balances, helped her recover quickly the next year. 

So what? Hedging saved Aditi from taking spontaneous action. 

Conclusion 

Ideal or magical funds will never solve a financial challenge. Mutual funds can be effective, provided the right strategy is adopted. It’s a “financial airbag” while there is a crash. Whether you fear the happening of a recession next or want to be smart, by these measures of diversification, asset allocation, and some right types of funds—defensive, bond, gold, low-volatility, or dividend-paying funds—you stand to lose as little as possible in market risk. 

Don’t just freak out when the media screams, “Recession coming!” Review your portfolio. Or better still, let your well-hedged mutual funds do the heavy lifting while you sit back and relax.

Start a SIP with a balanced mutual fund. Set some aside in gold/bond funds. Choose a dividend-focused fund. Revisit your mix once a year or when the economy shifts. Remember that this will save—always.

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Disclaimer – This article is informational in nature and does not claim to substitute expert advice. Investment in mutual funds is risky. Read the scheme-related document carefully before investing.