The Market is in turmoil, So what should New Investors Do Now?
One has to stick to the basics and avoid all the noise around. Its not the first-time market is volatile, nor would it be the last time it will fluctuate. But the question is, what should we do as a new and small investor?
Sensex crashes over by 1,600 points; Dow Jones corrects 4%; Oil per barrel may cross $100; Inflation is at record high; Russia may go on war against Ukraine; Covid new variant playing havoc; What would FED do? Will it increase interest rates? What would be the impact of higher interest rates on the equity market and mutual funds? Should I stop SIP?
Thought of selling all mutual funds even at a loss and putting the amount in FD; Relatives call and say the stock market is a gamble!
If these are the headlines that you are reading these days and these are the thoughts on top of your mind and making you even more confused about the future of your investment, then you are at the right place and should read this article further. We don’t guarantee one solution to your investment problems but can assure you that you will be more equipped and have an uninterrupted investment journey ahead.
Both Demand and Supply and Greed and Fear Drive Equity Market fluctuations
A lot of factors play a significant role in equity market fluctuations. It includes geopolitical situation, economic growth, pandemic, central bank policy, etc.While it is true that equities are volatile in the short term, it has rewarded investors over a long time. One can go back in history and track the US market for several decades and Indian markets. Despite the Oil crisis, Gulf War, Pandemic, Great Financial Crisis, the market is growing stronger and has always risen from the situation and has given double-digit returns over the long term.
- Sensex was at a level of 700 in Jan 1990 and today stands at 58,000.
- After rising to more than 20,000 in Dec 2007, Sensex fell below 9,000 in Feb 2009 but recovered by climbing to more than 20,000 towards the end of 2010.
Therefore, it is like the markets remain volatile in the short term. It is futile to predict its level in the next six months or one year.
So What To Do ?
Investing in equities in an uninterrupted mode for the long term gives higher returns. If you still don’t believe look at the leading mutual fund’s performance during pre-covid days till dated 28/01/2022 (even after the 10% correction of Nifty from all-time high), you may refer to www.value researchonline.com for quick reference. Most of the leading funds have given a 20 to 30% return in the last three years, including the market crash of March 2020.Now compared with FD, whose return is between 4-6% in the last few years (source: RBI), you know that even investing in FD can be risky if we take inflation into account.
Therefore, it is in your hands whether you want to play it safe, die in the hands of inflation or invest in equity mutual funds for the long term by applying proper strategy and withstand the volatility of the equity market in general. Some say we were lucky to have a V-shaped quick recovery post covid. Therefore, let us look at how Nifty has performed in the longer term, much beyond Covid.
- Nifty delivered 14x in 25 years, 11% CAGR (April 96 to Feb 2021), Source Economic Times
- Nifty declined in only 7 of the 25 years, Source: MOFSL
- As per the Mirae Asset study, Nifty 50 has given a 14.1% return in the last 20 years (after adjusting dividends). During the same time, Gold has given 12.38% while FD has delivered 7.1%. (Source)
These are the returns of the Nifty 50 index; several leading funds have beaten the index by more than 3-5%, so we are talking of a return of 17% to 20% in some of the leading funds over a long period of 20 years. We are now aware that this is not the first-time Market is volatile, nor would it be the last time it will fluctuate. But the question is, what should we do as a new and small investor?
One has to stick to the basics and avoid all the noise around. A young investor should continue to deploy his savings through monthly SIP in a few selected mutual funds.
Final Thoughts
And there was a reason we mentioned in the earlier article to invest only 50-60% of our savings (after setting aside six months to one year of emergency expenses in an FD) in equities. The remaining 40-50% of your savings in debt instrument (FD, BONDS, Gold) provides you a cushion during these volatile times when you don’t feel an urge to stop your SIP or sell your equity investment. You may follow the below steps during volatile times.
- As you may have extra cash, deploy some lump sum amount directly to your mutual funds in addition to the SIP. In this way, you will be able to take advantage of the correction or crash; however, don’t be greedy. Only put 10% in one go and spread it over a few months.
- If you are new to mutual fund investing, you may avoid putting lump sum amount and continue SIP.
- One can also increase SIP amount if the Market corrects aggressively (greater than 20%)
- Please don’t fall for new fund offers and thematic mutual funds in these times (more on it later)
Therefore, focus and improve your performance at work, increase your earnings and let the SIP run in auto mode and you may put some money in tranches too to take advantage of the corrections. But don’t be Greedy!!
Are you still afraid of the grumpy ride?
Disclaimer: This article is only for educational purposes and shouldn’t be taken as advice to invest in markets. You may please consult your financial advisor before investing.
Rajiv Sharma
Rajiv has worked for more than 15 years with Big 4 and other Multinational companies such as KPMG, EY and C&W in research and consulting role. His educational qualifications include BTech from NIT Nagpur and Masters in Construction Management. Apart from his primary expertise in real estate business, he is passionate about personal finance and stock markets. He is avid reader and researcher who enjoys sharing his learnings in the field of personal finance and capital markets.
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