How Investors should react when markets crash
It is time to be calm and do not reconsider your decision to invest in equity funds. Stay focused on your long term goals.
Indian investors were in for a rude shock on Saturday, June 18, when the RBI Governor announced his decision to move to academia when his term ends in September, 2016. They were waiting anxiously to see how the market will react on Monday to this announcement. However, after an initial hiccup, the market went into the green zone reacting to the positive initiatives announced by the Government.
If Dr.Rajan’s exit was not enough to unnerve the investors, then Britain’s decision to move out from the European Union (EU) sent panic waves across the global markets and the carnage was witnessed on Dalal Street as well. A majority of the equity funds have ended on a negative note in the last 1 week and our investors have started getting goosebumps thinking about the direction of the markets in the coming months.
The question that investors need to ask themselves is that “Do they really need to get into a nervous mood whenever the market decides to react to domestic and global uncertainties? After all we are all dealing with stock markets, with ups and downs that can be compared to a roller coaster ride; however, there is definitely light at the end of the tunnel! Equity as an asset class is known to have created wealth for our investors in the long term.
In this context, there is always a debate going on if investors should go in for direct equities or mutual funds, if they want to take advantage of this asset class. My submission has always been in favor of mutual funds, as one of its biggest advantages is the diversification that it provides in a portfolio along with the expertise of a fund management team that adds value to stock selection. We are of the view that stock selection and timing the market is not something which every investor will want to get involved with during the course of their normal rat race. It is better left to the experts who are accustomed to the roller coaster ride on a daily basis.
Now coming to the mutual funds, investors can enter via the lump sum or the systematic investment plan (SIP) route. The lump sum route is suggested for the matured investors who keep a track of the market movements on a regular basis and hence can use every dip as an entry point. However, for all the other investors, SIP can be the best alternative to enter equities which if invested over a long term will help them in achieving their life goals.
I’ll demonstrate the above by providing examples of a few funds that illustrate how investing in SIP over the last five years has benefitted our investors. An SIP of Rs. 2000 into 5 funds namely Birla Sun Life Frontline Equity Fund (Large Cap), ICICI Prudential Value Discovery Fund (Multi Cap), Mirae Asset Emerging Bluechip Fund (Mid Cap), DSP BlackRock Micro Cap Fund (Micro Cap) and Axis Long Term Equity Fund (ELSS) over a time frame of 5 years would have delivered 16.10%, 23.12%, 28.72%, 32.75% and 22.03%. In short, a total investment of Rs. 1,20,000 each into the 5 funds would have become Rs. 1,78,988 Rs. 2,12,116 Rs. 2,42,311 Rs. 2,66,342 and Rs. 2, 06,639 respectively on June 24, 2016, the day Sensex tanked ~ 600 points reacting to BREXIT. All the five funds mentioned above were in the negative zone during the last week, yet over a period of time, they have definitely rewarded our investors.
Here again, investors need to remember that if they had put their surplus in any fund, the result would not have been the same. This is because there are funds in the industry which have delivered negative returns over a period of five years. Hence prudent fund selection is the most important criterion that investors will have to keep in mind while creating their portfolios.
My earnest request to investors is to not blindly include the funds quoted above in the portfolios on account of their superlative performance. The examples have only been given to show that they should stay calm while the markets go aslant and the very same market will reward them for their patience. The funds in the portfolios should strictly adhere to the risk profile, goals and time horizon of the investors.
DISCLAIMER This article is not to be construed as an offer or solicitation for the subscription, purchase or sale of any mutual fund. No investment decision should be taken without first viewing a mutual fund’s offer document/scheme additional information/scheme information document. Any advice herein is made on a general basis and does not take into account the specific investment objectives of the specific person or group of persons. Investors should seek for professional investment, tax, and legal advice before making an investment or any other decision. Past performance and any forecast is not necessarily indicative of the future or likely performance of the mutual fund. The value of mutual funds and the income from them may fall as well as rise. Opinions expressed herein are subject to change without notice.
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