In NEW DELHI: If you invest in mutual funds, you must be uneasy about the recent market action. Yesterday, the Nifty dropped below 10,200, while the Sensex started 900 points down. The Indian stock market began lower than other Asian markets on Thursday, reflecting the overnight decline in US stocks, which fell more than 5.
This fall wasn't an accident. The Indian stock market has been suffering almost every other day. The benchmark indexes have dropped more than 13 percent from their all-time high levels in August due to a storm of subpar macroeconomic data, the IL&FS crisis, the threat of more defaults, and foreign cues.
Investors' jitters are understandable. In only five minutes, the 900-point drop today destroyed investor value worth Rs 4 lakh crore. Should I abandon my systematic investment plans and should I keep investing are questions that many investors in mutual funds seem to be asking.
Every time the markets decline, tiny investors are faced with this conundrum. Sadly, people frequently choose poorly and regret it. To prevent future losses, some people cease their systematic investment plans (SIPs) in stock funds, while others sell their investments.
Don't time the market
Equities naturally experience volatility. It is virtually difficult to forecast the behaviour of the markets on a given day. Investors halt their SIPs or redeem their investment when the markets fall. This is not something you should do, says A. Balasubramanian, CEO of Aditya Birla Sun Life AMC. "The world is unpredictable right now, and there will be a lot of complexity, ambiguity, volatility, and unpredictability. Investors should maintain their composure and stay away from the chaos and volatility during such periods. He advised attendees of the ET Wealth Investment Workshop in Bengaluru last month to focus on the long term instead. He told the audience to ignore the hubbub and keep investing little amounts regularly in mutual funds. The simplest method to mature, according to him, is through systematic investing, or SIPs.
The cover story of the most recent ET Wealth issue back-tested the market to see whether mutual fund investors should try to time the market by selling before it falls. A five-year-old investor who began SIPs in a diversified equities fund and kept investing regardless of market trends would have made a return of 10.5%. However, an investor who was able to exit the market a day before the meltdown and escape the Sensex's ten largest drops would have made 13.8% gains.
What happens though if the SIP returns over the last year have been negative?
Investors should not halt their SIPs due to a market decline. After a fall, it provides them the option to add more units. Long-term investors can expect the equity markets to experience a number of ups and downs, some of which will inevitably result in losses. Long-term nominal GDP growth rates are followed by equities market returns. Investors should thus keep making SIPs regardless of if they are producing negative returns.
What actions should you take if scheme returns have fallen off?
One year is not enough time to evaluate a scheme's performance in a SIP and is certainly not long enough to make an equity investment decision. You should ideally give the plan three to five years to work. However, you may examine the scheme more closely and switch to another one with a superior performance if it occurs to underperform its benchmark even during a three-year period. Alternately, you can speak with an adviser or other expert before making a choice if the scheme's mission has changed or the fund management has changed.
How to timing the market and what occurs
Data was back-tested to see how much a SIP investor would have profited by avoiding the Sensex's 10 largest drops since October 2013 in the same ET Wealth cover story.
1. Consistent investor: Continued making SIP investments despite market fluctuations.
The easiest approach to implement is one that requires no work from the investor. He only has to continue making careful investments.
3.96 lakh rupees for the corpus
Profits: 10.51%
2. A good timer: Exited one day before each of the 10 collapses, and the whole amount was reinvested on the next SIP date.
Must consistently be fortunate: Must possess the ability to foresee market fluctuations and the bravery to reinvest the full amount on the following SIP date.
Corpus value: 4.33 lakh rupees (minus Rs 5,945 tax on short-term capital gains).
13.77% in returns
3. Cautious timer: Withdrew a day before each of the ten crashes, but returned after skipping the SIP for the next month.
Those most likely to use this tactic are: The ability to predict the future and the stomach to reinvest after a month is required.
Rs 3.96 lakh for the corpus (plus Rs 4,151 short-term capital loss which can be adjusted against other gains).
10.54% in returns
4. Bullish timer: Increased investments on all 10 crashes by delaying the SIP for the next month.
Must be able to invest on a day when everything is going wrong. Sounds excellent on paper, but challenging to implement. Even this bravery won't result in significant gains.
3.97 lakh rupees for the corpus
Profits: 10.63%
(In October 2013, all investors began SIPs of Rs 5,000 in HDFC Equities, a diversified equity fund. The first trading day of each month is believed to be the date for all SIPs. returns based on the internal rate of return. As of October 4, 2018, the data.)
