The equity markets have slid sharply in the past few weeks. A number of retail investors who had entered the equity markets in the last year are a worried lot. And I am not talking about investors who invest directly in the stock markets. I am talking about those who took the Systematic Investment plan (SIPs) route to invest in equity markets. For a new investor, it is not a good feeling to see her portfolio down by 10%. Investors who have been around for a long time won’t be that worried. In fact, they may even see this as an opportunity to accumulate. They realise volatility is in the nature of equity markets.
Coming back to new investors, I have been getting a lot of calls from friends and clients. Their tension is palpable. After all, their hard earned money is at stake. Though a lot of time goes towards reassuring them about their investments, almost all of them had three common questions. I will just list down those questions and my objective answers. Of course, it requires more than these objective answers to convince them but we will get to rationale later.
They have read a lot that they should not liquidate their investments in panic. So, no one really talked about liquidating investments. Anyways, retail investors, in general, do not like to book losses. Well, nobody does but retail investors have that special aversion to booking losses. They were more concerned about whether they should stop making any further investments. Let’s get down to their questions first.
How much down can it go?
I do not know. It can go down to 7,000 (Nifty), 6,000 or even lower. It may even get back soon to 8,500 or even higher. Honestly I do not know.
Then, should I discontinue my SIPs?
No. That’s not the way you invest in SIPs. You should be happy that you will get more units. When the markets get into uptrend again, you will get even better returns (than if markets had not fallen so sharply)
Then, should I at least stop my SIPs till such time volatility subsides?
No. What is your measure of volatility? Are you looking at statistical measure of standard deviation? Or do you simply mean that let the markets get back to previous high and then you will start investing again?
The problem with such an approach is that it is extremely difficult to implement. How do you know where the bottom is? The markets may go to 7,000, then back to 8,500, then down to 6,000 and then up to 10,000. So, when would you decide to restart your SIPs? In fact, with this approach, you will almost tend to buy at highs. This is the problem with most of us. We enter when the markets are making new highs and stay away when the markets are down. This approach may suit a trader, not an investor.
Underlying Premise behind success of SIPs
Most financial planners recommend SIPs to their clients. Their recommendation has an underlying premise that the markets will do well over the long term. If you believe Indian economy will do well over the long term, Indian stock markets will do well too. And so should mutual funds and SIPs.
If you take away this underlying premise, your SIPs are unlikely to create long term wealth for you. If you believe Indian economy will not do well over the long term, stop your SIPs right way. Mutual funds do not perform in isolation. A SIP is no magic wand. However, nothing so significant has happened in the past weeks that has damaged the long term prospects of the Indian economy. If that’s the case, continue with your SIPs. I do not know how to quantify “well” but you get the idea.
It is better to buy at lower levels
SIPs work on the basis on rupee cost averaging. You invest a fixed amount every month. When the markets are high, you get lesser number of units. When the markets fall, you get more units. This way, you end up averaging your cost. The best part of a SIP is that you do not have to do the most difficult part of timing the markets. Most people try and fail to do so.
If you feel that equity markets will do well over the next few years, does it not make sense to buy at lower levels? Yes, the markets can go even lower but then you just keep investing. When the equity markets rebound, you will reap the benefits.
Let’s consider an example. Let’s say there is an index fund that replicates Nifty performance perfectly. This means if Nifty goes up by 1%, NAV of the fund goes up by 1%. On the other hand, if Nifty goes down by 1%, NAV of the fund goes down by 1%. So, if Nifty is at 8,500, NAV is 85. If Nifty is 7,500, NAV is 75.
I asked all of them a simple question. If you believe Nifty will touch 10,000 or 15,000 in the near future (or the NAV will go to 100 or 150 in the future), where will you prefer to buy your units at? At Rs 75 or Rs 85 or Rs 60? Their answer was Rs 60. Of course, the lower you buy, the better it is for you.
Then shouldn’t I wait and buy at the bottom?
Most of them retorted shouldn’t they wait till the NAV reaches 60. Do they know if the NAV will ever get to 60 or if 60 is the bottom? They didn’t know. Nobody knows. Everybody speculates about it but nobody knows it. If you could know what the bottom is going to be, then it would have made sense to buy at the absolute bottom. Since you don’t know, does it not make sense keep accumulating at lower levels and not indulge in futile speculation?
Trading Vs Investing
Traders hold a different perspective in falling markets. They stay away till such time they see signs of recovery or they will even take short positions. But you are an investor, not a trader. Traders look to profit from short term movements, while investors look for long term wealth creation. You 'invest' in mutual funds. And you must not have a trader’s psyche while investing. Stick to the investment discipline.
There is no reason to get unduly worried. Equity markets are like this only, volatile and unpredictable. If you believe in the long terms prospects of the Indian economy, it is an opportunity for you to accumulate at these lower levels. Yes, the markets can go down even further. That will be an even better opportunity.
You have already taken a giant leap from the comfort of fixed deposits to high risk and reward equity fund investments. Don’t desert this approach midway. Stick to the investment discipline and continue with your SIPs.
Deepesh is a Sebi registered Investment Adviser and Founder, PersonalFinancePlan.in