Dont Act In Haste During Market Downturns
These are testing times for equity fund investors as the stock market has been witnessing a steep fall since the presentation of the Union Budget 2019. There were lot of expectations from the budget, but it evoked a mixed response from different sectors. The stock market gave a big thumbs down as the government refused any respite to foreign investors registered as trusts from proposed super-rich tax. Besides, the subdued corporate earnings, foreign fund outflows and weak global cues continue to weigh on the market.
Hemant Rustagi Chief Executive Officer,
Wiseinvest Advisors
In fact, the last year-and-half have been quite challenging for equity investors. Although the benchmark indices touched all-time highs after the BJP-led NDA swept through most parts of the country in the general elections, many investors were disappointed as their equity mutual fund portfolios did not keep pace with the market.
While this happened mainly because only a handful of stocks contributed the most to the rally in the benchmark indices and small-cap as well as mid-cap stocks bucked the market trend, many investors attributed it to the quality of funds in their portfolio. The point that most investors miss in times like these is that different segments of the market perform differently over different time periods, and hence poor returns from funds investing in under performing segments should not become a reason for making changes in the portfolio. Therefore, make sure that allocation to different segments does not take you beyond your risk-taking capacity.
Simply put, the changes in your portfolio should be made either to realign it in line with your personal situation or to weed out non-performing funds in it. It is quite common to see investors making frequent changes in the portfolio based on short-term performance of funds. In reality, one must give a fund manager at least 12-18 months to get the performance back on track before considering any change. Sometimes, changes in the rules, laws and government policies may also require you to realign your portfolio. As is evident, a situation like the current market alone should not be the sole cause for making changes in the portfolio.
It is heartening to see an ever-increasing number of investors adopting a disciplined approach for investing in mutual funds. Investing through SIP is a great strategy as it not only brings in a discipline into one’s investment process, but it also allows investors to benefit from “averaging”, especially when they invest in equity and equity-oriented hybrid funds.
While systematic investing helps in keeping emotions out of investment process and turning volatility to one’s advantage, the negative impact of volatility on the portfolio in the short-term does not get eliminated completely. Therefore, one should not panic when some of the funds produce negative returns for a certain period. In fact, investments made at lower levels improve returns considerably over the longer term.
Therefore,do not make the mistake of discontinuing regular investments because of short term negative returns. No doubt, it can be quite challenging to tackle a steep fall in the portfolio valuation during market downturns. The best way to avoid making haphazard decisions during such periods is to align investments made through SIP to some important goals. For example, if you are investing in equity funds through SIP to create a corpus for your children’s education, the focus will remain on securing your child’s future and hence you would continue investing and achieve an important investment goal of your life.
Investors must remember that these kinds of volatilities will keep testing their patience and perseverance from time to time. However, it does not take away the potential of equity as an asset class to provide higher returns than most other asset classes in the long run.