By Amit Rathi
During uncertain times like the current Covid-19 pandemic, wealth planners and fund advisors often face questions like “Should I withdraw my mutual funds?”, “Is it time to stop my SIPs?” “Should I stay invested?” There is no way to know what the future holds for the stock market under the current circumstances. What you can do is to make your financial planning and investments as sound and safe as possible.
Let us look at what can be done in this situation.
The history of the stock market has taught us that ultimately the stock market moves upward. There were times when stock markets had seen bloodbaths. Often, it felt like the end of the story. But, surprisingly enough, the market bounced back every time. Whether it is the 1992-crash, 2006-crash, 2008-crash or 2016-crash… the market always emerged strong.
A similar pattern may be observed during the current crash. There can be short-term setbacks, but ultimately the market will move forward. The reason is simple; India is one of the largest and most thriving economies with a massive population of 1.3 billion. Such a vast market can revive its demand and prosperity on its own. So, taking a long-term perspective, this crash has provided a golden opportunity for those who are looking for wealth creation.
Currently, the stock market is volatile – it can swing anywhere between highs and low. So, if you have an excellent financial advisor, you should surely give a thought to investing in mutual funds for long-term gains. But be aware, these goals should be long-term.
Set a long-term goal
Empires are not built in a day. So, when you start investing through mutual funds and SIPs, you should prepare yourself to stay invested for long durations. A longer duration iron outs the fluctuation in your investment with the “magic of compounding.”
Let us say you are investing Rs 1 lakh in a large cap mutual fund that gives a CAGR of 9%, compounded semi-annually. You can accumulate around Rs 3,74,531 in fifteen years. Now, let’s see the magic. If you stay invested for just five years more, the amount that you will accumulate would be Rs 5,81,636, almost 40% more.
This clearly shows the importance of long-term investment.
How concerning is this correction?
Corrections erode investor’s wealth within days. When corrections like the recent ones occur, people often take emotional decisions and start withdrawing their money invested in mutual funds to prevent further losses. Let me tell you that this is the worst decision you can ever take! As the history of the stock market suggests, corrections are short-lived. The bounce-back that follows makes a long run, benefitting those who make logical decisions.
No doubt, the situation is precarious, and it is understandable that you are concerned with your investments. But the damage is already done. Chances of the market going further down sharply are slim. If you exit now, you will be throwing away your money. Yes, the correction might be alarming, but it is normal in the stock market. The boom and bust cycles in the market re common and inevitable. There is nothing to fear.
Should I stop my SIPs right now?
Let’s understand the concept of SIPs first. The sole purpose of SIP is to beat market fluctuations through cost averaging. When the market is down, you buy more units and can average out the high cost when the market is booming. Past analysis of SIPs shows a clear picture. When the market falls, the best thing to do is to continue your existing SIPs and add some more to your portfolio. This approach can help you build considerable wealth in the longer run. Recent sell-off have bottomed out almost every mutual fund portfolio. So, if you have enough cash flow, you should consider starting new SIPs undoubtedly.
Here, quality is a major concern. Generally, Small caps and mid-caps outperform base indices and large caps. But when times are gloomy, large caps and balanced funds are the only viable options. If you already have such funds in your portfolio, you should continue with your investment. If you don’t, get them now! It’s now or never!
You might have read various articles from some “experts” stating “the situation is worse than 2008’s economic crisis”, “Global economy has come to a standstill” and what not! What these “experts” lack is a fundamental understanding of the stock market. As the time elapses, Market tends to move upwards, and not vice-versa.
So, if you are worried about your investments or planning to take a plunge, now is the time. Get in touch with our financial advisors to devise a successful strategy for your investments.
(Amit Rathi is a Certified financial Planner, based in Kolkata)