(This is a letter to all the retail mutual fund SIP investors, who are facing a market crash for the first time.)
This new threat of corona virus has rattled the whole world. While the safety and necessary precautions are of paramount importance at this time, the crash in the financial market is no less a concern. ‘Coronavirus will bankrupt more people than it kills,’ goes a viral message on social media. The market benchmark Nifty-50 made a new historic high of 12400 on 20th January only to crash nearly 40% to 8600 on 13 March 2020. A similar, or worse, carnage was seen across global equity markets over last few weeks.
Do we know when the threat of Corona virus will pass? Most certainly NO. But there is one thing we know for sure. This, too, shall pass. It is very important not to react to the situation and book permanent losses in your portfolio.
It may be right to argue that no one can predict how markets will behave or how much returns our investments will earn in next 2-5-10-20 years. But let me remind you of the fundamental reason of why we are investing in the Indian equity markets – India is a young and growing country, which is likely to become world’s third largest economy within next 5-7 years. We all want to participate in that massive economic opportunity.
Equity is risky. You’d have heard that often from your friends, from us or through countless media articles. When everything is going fine, the concept of ‘Risk’ gets somewhat fuzzy to imagine. Hence, let me tell you what is happening right now in the markets is the ‘Risk’. It is precisely because of this embedded risk that Equity as an asset class holds potential to generate significantly higher returns than ‘fixed income’ or ‘debt’.
Always remember, it is your conviction in the asset class and the time you allow it to grow that determine the returns you get.
We all accept that investment in real estate or gold – just like equity – is subject to market risk, and that past performance is not indicative of future performance. Still, we hold onto our real estate or gold assets in bad times out of conviction that a time will come when they will turn profitable. For example, last nearly 10 years even the best of real estate market in India hasn’t generated 4-5% CAGR – the worst have actually fallen by 5-10% annually. Likewise, gold prices remained range-bound between 2012 and 2018. Investors held onto them because they had faith. Today is the time when we need a similar faith in equities. Good news is that history shows repetitively how equities bounce back after a debacle to reach new record heights.
At a time when the media is full of bad news and every forecaster is busy predicting a dooms-day scenario it is indeed difficult to hold this conviction on equity investments. If you are feeling jittery, be assured that you are not alone. But there are a few things that are in your favour.
Firstly, you are not a day-trader nor is share market your primary source of income. You are a long-term investor with 5-10-15 years of investment horizon. Your standard of living is absolutely insulated from the vagaries of share markets.
Secondly, you have an emergency / contingency fund in safe interest-bearing instruments, which will ensure you are not financially stressed in case of any unforeseen circumstances.
Thirdly, your asset base is well-diversified. The diversification is necessary precisely for the purpose of averaging out in periods when one asset class underperforms heavily.
Fourthly, you are investing in equity mutual funds through SIPs / STPs, which is a mechanism solely designed to ride over the market volatility. Your investments in the current times will earn you the highest returns in years to come.
Lastly, your financial goals in next 1-2 years can be funded through interest-bearing instruments.
In short, what is happening in the markets is, although extremely undesirable, is natural and you have already taken steps to be insulated from its worst effects. This makes any impulsive reaction not just unnecessary, but also potentially harmful.
One might ask whether the markets have bottomed out and whether we won’t see any further fall. Frankly, anyone answering this question with certainty is either God or a fool. It is very much possible that the markets would go down further, before bouncing back. However, one thing every investor should remember is that the markets didn’t tell us before crashing, likewise, they won’t tell us before jumping back.
To conclude, let me just summarise. Corrections and crashes in equity markets are commonplace and so are bounce backs. It is this volatility and uncertainty in equities that create potential for superior returns. We are in it for the long haul and are well prepared to face short-term volatility. When the markets are down, it is time to remain invested and continue SIPs – invest more, if possible – but not to exit.
Let’s all pray that this global calamity gets over and the normalcy is restored soon. We are always available in case you have any query.
With warm regards,
Pro-F Financial Consultants (M): +91 7021873501