Events like the March 2020 episode happen rarely but when they do happen, they end up teaching us many lessons.
Since the lows of March 2020, the stock market has recovered a lot and is currently flirting near the all-time high levels. Equity mutual fund investors are sitting on some pretty gains depending on the time they have started to invest. Of late, there has been some shake-up in the prices of stocks in some segments of the market, especially in the mid and small caps. The recent volatility being witnessed is only a reminder to the investors that the stock market is not a one-way street and there will be ups and down over the long term. Still, equities have shown to drift upwards over the long term irrespective of short to medium term course corrections.
A lot of new investors have joined the market bandwagon lately and may not be as familiar with the volatility that equity markets are prone to. A market crash or a stock market bubble, there’s always a ground for the new and existing investor to keep learning new things. “Events like the March 2020 episode happen rarely but when they do happen, they end up teaching us many lessons.These lessons are practical experiences of the theory we’ve been taught for years in investing. The main lesson is that markets are volatile in the short term and move upward in the long term in growing economies like India,” says Harsh Jain, Co-founder and COO, Groww.
While stock prices and NAVs of most funds have moved up from their lower levels, a scare hit the markets recently. The fall was predominantly in the mid and small cap stocks but the downside got arrested to some extent. Whether the broad market rally continues only time will tell. To remain invested and make use of the opportunities is what an investor should try to do.
“Among investors who started a couple of years ago, those who remained invested and did not pull out are sitting on good gains. Seeing these gains, several new investors got in the game. Today, new investors are getting positive reinforcement because of the market performance. Short-term ups and downs test investors’ patience and belief in fundamentals, which is important for successful investors. The long term investor is winning while investors who keep hopping in and out of markets tend to lose money,” says Harsh.
If you are investing through equity mutual funds, have a long term plan in place. Link your investments in mutual funds to your goals that are at least 7 to 10 years away. As and when there are market corrections or dips in the share prices or in certain segments of the equity funds, use the opportunity to buy more. For example, if there is a big correction in the large-cap category, add more into the large-cap fund folio that you are already invested in. It helps to bring the average cost of holding much lower.
Your existing SIP’s need not be discontinued until about three away from goal. If there is a correction, it’s time to rather add more into the same folio. To start a fresh SIP, there’s no point in waiting for the market to crash. If at all, there is a big correction, you can always add more. If you feel that that market is overpriced, opt for STP. However, in doing so, make sure to deploy the funds between 3-6 months rather than trying to catch the bottom of the market.
Catching the bottom of the stock market is the dream of most investors. Easier said than done, it’s more of a futile exercise when your goal is several years away in future. Rather than trying to time the market, your aim should be to let your money be exposed to equities for a longer time frame.
A better way to keep your risks under control is to be diversified across market capitalisation, secrets and mutual fund schemes. However, do not keep buying schemes just for the sake of diversification. Your core portfolio may comprise large-cap funds while some exposure to mid and small cap depending on your risk appetite may be considered. Do not merely look at the short term or 1-year performance to buy a new fund. And, make sure you have investment in index funds in addition to the few consistently performing active funds.
Finally, if your goals are near, it’s time to exit from the volatility equity funds to less volatile debt funds. Start your de-risking process at least three years away from your goal. After all, with markets at an all-time high level, there could not be a better time to reap the benefits of our long term equity savings!