Many investors panic when the whispers of a slowdown or recession start to take place. The fear of recession stops them from investing, and because of this, they lose a significant opportunity to accumulate good investments at cheap or reasonable valuations.
In this article, we will dig deeper into whether it is good to invest in mutual funds during a recession and see the best recession investments so that your portfolio is protected.
Is it good to invest in mutual funds during a recession?
Economies go through a cycle. There will be phases of booming as well as downturn. During a slowdown or recession, businesses with weak fundamentals suffer the most, and those with strong fundamentals protect your portfolio. In such scenarios, diversification plays a crucial role.
If you have invested your entire money into a single stock with weak fundamentals just because it delivered impressive returns during good times, it can cost your life’s savings.
Because of this, mutual funds, which are well-diversified investments, can help you to protect your portfolio in tough times.
Mutual funds are professionally managed investments where funds are invested in various stocks and not just one company.
Due to this, you get exposure to all the companies in which the mutual fund has invested when you invest in that mutual fund scheme. This reduces your risk significantly and gives a shield to your portfolio.
By investing in mutual funds during the recessionary phase, you can accumulate good investments which would reap the benefits when the economic conditions improve.
Hence, a mutual fund is a good investment option during a recession.
Best investments during a recession
You might also come across these questions – “Which are the best investments during a recession” or “which are the recession-proof investments?” To answer these questions, you can consider the following points.
- Small companies, companies with weak fundamentals, and companies having large debt on their balance sheet are the ones likely to suffer the most during tough times.
- Large companies that have substantial market share and companies that sell products that are non-discretionary and have strong demand are expected to perform better than the others.
- During hard times, corporate governance and management competence decide the fate of the businesses. Hence, investing in businesses that are professionally managed and run with good business ethics is essential.
- Apart from equities, gold is considered a hedge against inflation and holds its value even during a recession.
- Debt funds with low risk or Gilt funds can provide you with some capital protection during the short term of difficult times.
Best funds to invest in during a recession
Considering the factors mentioned above, well-diversified large-cap mutual funds and consumer staple funds provide the opportunity to protect your portfolio and can be the best recession investments.
Also, one can consider investing in dividend yield funds during the recessionary phase because these companies are supposed to have strong balance sheets; otherwise, they won’t be able to pay high dividends.
Small-cap funds can be a good option for aggressive investors with long-term time horizons. A risk-averse person can consider investing in a multi-asset mutual fund as it invests in various asset classes such as stocks, gold, debt, etc.
Investing in various asset classes reduces the overall risk and can protect you in the downturn.
Other points to be considered during the recessionary phases
It is essential to keep investing, no matter the economic condition. Yes, the investment strategy may be changed, but stopping to invest will harm you in the long run.
This is because money loses its value over time, and only investing in the proper manner and asset classes can save you from inflation.
Another point to note is that keeping a long-term view while investing is essential. Because economic conditions do not always remain the same, you will see bear markets followed by bull runs.
It becomes imperative to have a long-term time horizon while investing. And lastly, you should review and rebalance your portfolio periodically.
Conclusion
Continued investments are the best strategy for investing, and investors should keep investing rather than waiting for the best investments during the recession.
And if you still need clarification, consider calling us for a discussion.
