For most investors, March 2020 has been a long month. We have seen the biggest market fall since the global financial crisis of 2007-08. As of 23rd March, the drawdown from the market peak is about 37 per cent. Most equity investors have seen their portfolio lose a significant chunk of gains and for those who recently entered the markets, a significant chunk of their invested capital.
This is not a situation being faced just by Indian investors but almost in every market that has a stock exchange. The reason behind the downfall is the COVID-19 pandemic. The fact that oil prices have crashed thanks to moves by Saudi Arabia, did not improve matters. In the Indian context, the crisis in the banking sector has also contributed.
In general, fear and uncertainty are at an all-time high. The India VIX or volatility index is at its highest point in a decade. This is a critical phase that is likely to have a huge impact on wealth creation for equity investors. This is why most investors, especially those investing in equity mutual funds would be asking themselves, “what should we do now?”
The first thing to ensure for any investor is to have a clear emergency fund that can take care of 6-12 months of all expenses, EMIs, school fees, or any other planned expense. These are unprecedented times and it is important to safeguard the near term needs of the family.
Money invested in equity should be the ones that are not required in the near future. This is an informal yet cardinal rule of equity investing or for that matter investing in any volatile asset class.
Withdrawing now, especially from equity mutual funds, is not an optimal move. Market falls, typically, have been temporary. No one would invest in the asset class in the first place if it was a permanent thing.
Mutual fund investors should note that the MF units they hold are representative of the best of the economy. They did not get there without seeing a market crash and economic slowdown. Avoid converting your notional losses into permanent losses.
Stay invested and stick to a reasonable asset allocation depending on your goals and objectives.
The first thing to remember here is that your SIPs are towards your long term financial and life goals. Think goals like retirement, kids education, or a nest egg for some specific long term goal.
Secondly, if your SIPs are invested in equity funds that have a history of consistent performance, and these funds are aligned to your objectives, continue them. The market fall means that you would be getting more units for the same amount of money. This is called rupee cost averaging. This will have a significant positive impact on your portfolio once the market recovers over the years. In case you are re-thinking the choice of your funds, you can consult a good wealth professional.
It is important to stay invested and continue adding systematically to your equity portfolio. You can consider adding to your monthly SIP commitment if you want to make up for your reduction in the equity allocation of your portfolio.
Asset allocation is the most important activity while investing for the long term. This is a regular activity and with correction in the market, you should look at increasing your allocation to equities over a period of time.
This is not the time for indiscriminate opportunistic buying. Those who think they can time the market bottom have been proven wrong before. The best approach is again to stick to your asset allocation based on your long term and short term objectives and invest the surplus via STPs (Systematic Transfer Plan) in the same proportion.
This may be a good time to revisit your asset allocation and assess whether it was aligned to your real financial goals or was it just aimed at investing in whatever was giving the best returns?
When you align your asset allocation to your goals, you select the asset class based on the time horizon and final value of the amount you intend to reach. If the goal is 10 or more years away, inflation is your biggest challenge. Hence, equity is the only option that can consistently beat inflation.
Similarly for short term goals, you select fixed income-based investments that are stable and secure. You should also always have an emergency fund in liquid investments that can help you tide over any loss of income or emergency requirement for a period of 6-12 months.
If you have complex goals, take the help of advisors to decide what is the best asset allocation. Rather than simply being aggressive or conservative, invest according to what you will actually need. This means allocating your savings such that your goals are covered.
For the regular investor, equity mutual funds offer the best option because you cannot predict which firms will do well. Holding a portfolio that has been objectively selected by credentialed and time tested professionals is the more logical choice.
Quick money is for speculators and that is pretty much a game of chance. Even if you are comfortably placed financially, we would recommend that you keep exposure to these asset classes to sub-5 per cent of your portfolio.
A 30 per cent fall is no reason to suddenly consider equities worthless. The Indian markets have recovered from 50 per cent plus drawdowns and over the long term, we are confident of the Indian and global economy to recover from this, even if changed. There are reasons for this. More than 65 per cent of the country is below 35. This demographic is just coming into the major savings and expense cycle of their lives. As a result, the demographics of the country will continue to propel it to long term growth.
Bank FDs, albeit of reliable banks, are savings products. Over the long term though, their post-tax returns have historically stayed below inflation. This means that they are not going to really help you create wealth to meet your long term objectives.
Remember that crises come and go, but your objectives are your own and need a long term approach.
Finally, stay safe and take care of your family. Distancing is the key. Whether it is self-isolation or distancing yourself from your investments by taking no action, distancing is the key to long term health or wealth wellness.
The author is the CBO - Scripbox