AFTER another turbulent week for shares we offer advice.

Why did markets tumble last week?

Investors panicked after French bank BNP Paribas said it was freezing three funds that had exposure to America’s sub-prime mortgage market.

A US housing slump and rising interest rates have left sub-prime borrowers (with poor credit ratings) battling to meet repayments.

Pension funds, insurance firms and hedge funds that invested in bonds backed by sub-prime mortgages are now facing heavy losses after a big jump in defaults.

News that US, Japanese and European central banks had pumped billions into the banking sector to help lenders shook the markets.

What does it mean for my funds?

The crisis has the biggest implications – at least initially – for corporate bond funds because investors fear the turmoil could infect the rest of the bond market.

Prudential, the insurer, took the highly unusual step last week of arranging protection against further bond market falls.

More than £37 billion is tied up in corporate-bond funds, which have dropped in value by an average of 0.4% over the past week. Funds exposed to riskier high-yield corporate bonds are down 0.7%.

While advisers do not suggest baling out, it is not the time to be putting new money into a bond fund.

And what about equity funds?

Justin Modray at Bestinvest, an adviser, said: “None of the funds available to UK private investors are directly exposed to America’s sub-prime market. But if the turmoil continues you would expect riskier schemes like smaller-companies funds to be worst hit.”

Financial funds could also fare badly because banks, including HSBC and Barclays, are exposed to the American mortgage market.

So how can I protect myself in a downturn?

It is generally not a good idea to quit equities altogether, as you risk missing out on a market rally when the correction is over.

However, now might be a good time to take profits from some riskier areas that have done well in the past few years, such as medium-sized companies, and put the money into sectors such as larger firms that pay healthy dividends.

A good way to access them is via an equity-income fund, and advisers suggest Invesco Perpetual Income or Jupiter Income.

Alternatively, now is not a bad time to be sheltering profits in cash given that savings rates are above 6%.

Another way to cut risk is to ensure you have a balanced portfolio. Modray said a medium-risk investor should have about 70% invested in equities, with 45% of that in UK shares, 25% in Europe, 13% in America, 7% in Japan, and 10% in emerging markets.

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