Volatility Shouldn’t Compel You To Stay Away From Investing In Equities

One of the reasons why investment in equities should be a significant part of one’s long-term portfolio is its ability to beat inflation. Globally investors have benefited from this wonderful asset class by building wealth to meet their varied investment goals. However, it has been a mixed bag for Indian investors. While investors in most of the emerging markets face this dilemma of whether and how to invest in equities, it’s time for Indian investors to embrace equities and make this asset class an integral part of their portfolio.

Considering that most of the past unpleasant experiences have been the result of haphazard investment decisions and inconsistent investment approach, it is not such a difficult task to get their equity investment process back on track.  Notwithstanding the current volatility in the stock market, investors must begin the process of either investing in equities or realigning their asset allocation to have an appropriate exposure to improve their chances of getting the best from their long-term investments. Remember, even the most volatile markets can’t undermine the long-term potential of equities.

To begin, it is important to choose the right method of investing in equities. For those who don’t have the experience and knowledge of investing directly into the stock market, equity and equity oriented balanced mutual funds can be a better option. Needless to say, equity funds’ investors hope to be suitability rewarded for the risk taken by investing in a volatile asset class like equity. No wonder, they feel happy when the stock markets soar.  However, the situation changes when the stock markets turn volatile. This is the time when investors often let their emotions dictate their investment strategies.

It is a well known fact that with any investments there are two key decisions to be made. The first is when to buy and the second is when to sell. Obviously, the difficult one is to know when to sell. In the current market scenario, the right strategy would be to not only hold on to existing quality investments but also continue with the investment programme, if one is sure about one’s time commitment. A long-term investor should consider the market level as only a milestone in the long march of the economy. For a new investor, any time should be a good time to begin the investment process provided the intent is to not only invest for the long-term but also through a disciplined investment approach.

It is a pity that only a small section of investors depend on equities to build wealth over time. Unfortunately, short to medium term market movements continue to influence investment decisions of a large number of investors.  As a result, equities have not been able to find a permanent place in the asset allocation process of Indian investors.

The encouraging sign, however, is that the number of investors investing through SIP has been on the rise over the last few years. While it is true that even those who invest through SIP can suffer losses temporarily during the market downturn, the impact on their portfolio would generally be much less as they continue to invest at lower levels and that turns volatility to their advantage by bringing their average cost down over time. Therefore, more money they invest at the lower levels, the lesser recovery they have to make to turnaround their portfolio performance. Investors who have continued their systematic investment process over the last 4-5 years will vouch for this as their portfolio valuations currently look completely different as compared to those who may have begun investing a year ago.  

There are other aspects that investors must follow before investing in equities. Knowing them will help them continue the process un-interruptedly. For example, one needs to assess one’s risk taking capacity as it goes a long way in tackling risks associated with equity investing. Another crucial factor is to diversify the portfolio adequately. Tracking the portfolio too is an important ingredient to achieve investment success.

Last but not the least, it all boils down to having appropriate funds in the portfolio and in the right proportion to get the best from mutual funds. As is evident, the key is to ascertain the right level of risk tolerance. It helps in customising fund category allocations as well as suitable fund selection. Before making a final selection of the funds, one must examine the quality of the portfolio as well as the performance track record.

Hemant Rustagi