The Indian equity market has been very volatile offlate causing some amount of panic among investors who are new to equity investing. For most, the question remains whether to invest into equities or should one just sit out till the time clarity emerges in terms of Russia-Ukraine conflict or how the rate hikes will pan out. There is clearly no single answer here.
To begin with, it is worth reminding ourselves that bear and bull market cycles peppered with volatility is a part and parcel of equity investing. It is nothing out of the ordinary. If navigated well keeping in line with investment basics and healthy financial behaviour, an investor can be surely successful over long term using proper investment strategies. The key is simple - be patient, disciplined and focused on your financial goals.
How much to invest in equities?
Equity is one of the riskiest asset classes but quite a rewarding one in the long-term. Ideally, one should invest only that much money in equity which is not needed for at least say 3-5 years. Further, equity allocation largely depends on your risk-appetite and age. Irrespective of the market situation, if you are a young investor avoiding equities may not be a healthy proposition. There is no question of not investing. The key to a successful investment experience lies in investing across varying market conditions – a fact which of investors overlook. Instead most investors spend time and effort in timing the market instead of concentrating on staying invested in the market.
Typically, for investors up to the age of 40, it is advisable to keep equity can be upto 60% of your total portfolio. As the age increases, it is generally recommended to reduce equity allocation as one’s risk appetite too changes with age. But the time when one’s is near to retirement say 55 years and above, equity portion can be as low as 20%. Since there is no one size fits all approach when it comes to portfolio construction, the ideal thing to do is to consult a financial advisor who will help chart out the allocation after considering various aspects of your life.
Things to remember at all times
a) Don't Stop SIP: Investments running through SIP route should not be stopped as units accumulated at lower prices help build wealth in the long run. SIP helps in averaging out the cost of investments and gets you more units which would escalate the compounding benefits.
Consider SIP as a healthy habit to fulfil your long-term goals. As good habits if discontinued can result in long-term collateral damage. Similarly, discontinuing SIP could prove to be a costly financial blunder.
b) Don't Redeem money if not needed: Unless you need funds or your financial goal is near, it is not wise to redeem your investment. A market correction or sharp volatility should not be the reason for redemption. Stay invested.
c) Make Additional Purchases: If you have spare cash to invest do consider buying more units of mutual funds/ETFs, especially at a time when market is in a correction mode.
d) Utilise STP: Systematic Transfer Plan (STP) is a powerful tool if used well. IF you are a conservative investor and is not comfortable with equity investing, then try this. Invest lump sum in debt and initiate STP into an equity fund. This will ensure while the bulk of your money is in debt, there is some amount of exposure to equities.
e) Have a Balanced Investment Approach: Very often investors focus on wealth creation and forget about wealth preservation. As a result, the portfolio tends to be imbalanced. The best way to maintain a balanced investment portfolio is by spreading investments across various asset classes. This involves investing in equity, debt, gold and other asset classes, each of which have a unique investment quality. While equity is for wealth creation, debt is for capital protection and gold acts as a hedge against inflation. So, each asset class has a role to play in the portfolio.
To conclude, stick with the basics and adhere to asset allocation at all times. Do not get swayed by short term performance of any asset class. History has time and again shown that investors who are disciplined with their investments will be rewarded over the long term.