The broad-based stock market indices are down anywhere between 15–20% from their peaks reached in September 2024, while the small- and mid-cap indices have declined by up to 25%. The sweeping tariffs announced by the US last week have spooked markets globally, including the Indian market. Amid this declining trend, many equity mutual fund investors, especially those experiencing such volatility for the first time are likely to face a difficult question: what should they do with their equity mutual fund investments?
While the exact answer may vary from investor to investor, here are five tips to help investors not just survive but thrive in a falling market.
1. Remind yourself that volatility is an inherent characteristic of equities
One of the most important characteristics of equities is that they offer higher long-term return potential compared to most other asset classes, but with a higher risk or volatility. Generally, investors focus on the first part, i.e. higher long-term return potential, some forget that investors who earn such returns also have to stay invested in equities during market falls, which are quite common. For e.g. over the 20 year period ending December 2024:
It’s important to remember that periods of uncertainty often present great opportunities for long-term investors to invest in equities at discounted prices. Like Warren Buffet says.. “Uncertainty, actually, is the friend of the buyer of long-term value.”
2. Do not allow your emotions to take over
It’s natural for investors to doubt their investment decision of investing in equities when the market is in a declining phase. So it’s quite common to consider making incremental investments entirely into less volatile asset classes such as fixed deposits, gold, etc. But this is where most investors make a mistake. Investment decisions are best guided by the asset allocation framework. If they don’t have one already, investors should try and have a framework in place. For example, if as per the asset allocation, if the desired equity allocation is 50%, investors can make incremental investment decisions based on this equity allocation framework, instead of deciding based on emotions such as greed and fear.
3. Stick to your SIPs as they help in accumulating higher units at lower market levels
One of the most important benefits of SIP is that they help in rupee cost averaging, i.e. they allow investors to accumulate more units of mutual funds when the markets are down, which over long term help improve the return on investments. Unfortunately, some investors tend to panic and stop their SIPs during such times - one of the worst mistakes one can make. So it's important not to panic, and continue the SIPs to avoid regretting later..
4. Invest lump sum in a staggered manner, if your asset allocation framework allows you
In cricket, they often say when you face a tough bowler, your aim should be to keep the score board ticking and when you face a weak bowler, you should try to hit at least one or two boundaries in an over. Investing after a market fall is like facing a weak bowler. Just like a batsman looks to score more runs when a weak bowler comes to bowl, investors should look to invest additional sums of money when markets correct, besides continuing with their SIPs.
However, even such lump sum investments can be staggered over a few months to reduce risk.
5. Keep calm, do not get swayed by noise
Lastly, it's human nature to over react to unusual situations and market corrections are no different. During such market falls, investors will often hear doomsday predictions from many people. But what they need to remember is that the stock market follows corporate earnings like a dog on a leash - sometimes leading, sometimes lagging but always connected and correlated. Therefore as long as investors believe in the long term economic growth which drives the corporate earning growth, they shouldn’t get swayed by such doomsday predictions.
These are tough times and it’s difficult to control one’s emotions when one sees losses in the portfolio. But the most successful long-term investors are those who can control their emotions and make investment decisions rationally. Following the above tips can hopefully help investors make rational investment decisions and make the most of the market declines.
(The author Nilesh D Naik is Head of Investment Products, Share.Market (PhonePe Wealth). Views are own)
(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of The Economic Times)
(Disclaimer: The opinions expressed in this column are that of the writer. The facts and opinions expressed here do not reflect the views of www.economictimes.com)
While the exact answer may vary from investor to investor, here are five tips to help investors not just survive but thrive in a falling market.
1. Remind yourself that volatility is an inherent characteristic of equities
One of the most important characteristics of equities is that they offer higher long-term return potential compared to most other asset classes, but with a higher risk or volatility. Generally, investors focus on the first part, i.e. higher long-term return potential, some forget that investors who earn such returns also have to stay invested in equities during market falls, which are quite common. For e.g. over the 20 year period ending December 2024:
- On 34.73% of the days (1723 out of 4961), the market was trading more than 10% lower than its previous peak
- On 16.45% of the days (816 out of 4961), the market was trading more than 20% lower than its previous peak.
- On 6.73% of the days (334 out of 4961), the market was trading more than 30% lower than its previous peak..
It’s important to remember that periods of uncertainty often present great opportunities for long-term investors to invest in equities at discounted prices. Like Warren Buffet says.. “Uncertainty, actually, is the friend of the buyer of long-term value.”
2. Do not allow your emotions to take over
It’s natural for investors to doubt their investment decision of investing in equities when the market is in a declining phase. So it’s quite common to consider making incremental investments entirely into less volatile asset classes such as fixed deposits, gold, etc. But this is where most investors make a mistake. Investment decisions are best guided by the asset allocation framework. If they don’t have one already, investors should try and have a framework in place. For example, if as per the asset allocation, if the desired equity allocation is 50%, investors can make incremental investment decisions based on this equity allocation framework, instead of deciding based on emotions such as greed and fear.
3. Stick to your SIPs as they help in accumulating higher units at lower market levels
One of the most important benefits of SIP is that they help in rupee cost averaging, i.e. they allow investors to accumulate more units of mutual funds when the markets are down, which over long term help improve the return on investments. Unfortunately, some investors tend to panic and stop their SIPs during such times - one of the worst mistakes one can make. So it's important not to panic, and continue the SIPs to avoid regretting later..
4. Invest lump sum in a staggered manner, if your asset allocation framework allows you
In cricket, they often say when you face a tough bowler, your aim should be to keep the score board ticking and when you face a weak bowler, you should try to hit at least one or two boundaries in an over. Investing after a market fall is like facing a weak bowler. Just like a batsman looks to score more runs when a weak bowler comes to bowl, investors should look to invest additional sums of money when markets correct, besides continuing with their SIPs.
However, even such lump sum investments can be staggered over a few months to reduce risk.
5. Keep calm, do not get swayed by noise
Lastly, it's human nature to over react to unusual situations and market corrections are no different. During such market falls, investors will often hear doomsday predictions from many people. But what they need to remember is that the stock market follows corporate earnings like a dog on a leash - sometimes leading, sometimes lagging but always connected and correlated. Therefore as long as investors believe in the long term economic growth which drives the corporate earning growth, they shouldn’t get swayed by such doomsday predictions.
These are tough times and it’s difficult to control one’s emotions when one sees losses in the portfolio. But the most successful long-term investors are those who can control their emotions and make investment decisions rationally. Following the above tips can hopefully help investors make rational investment decisions and make the most of the market declines.
(The author Nilesh D Naik is Head of Investment Products, Share.Market (PhonePe Wealth). Views are own)
(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of The Economic Times)
(Disclaimer: The opinions expressed in this column are that of the writer. The facts and opinions expressed here do not reflect the views of www.economictimes.com)
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