Nerve wracking crash followed by a stupendous rally – the past year and a half have spelled consternation for many mutual fund investors; especially those who exited in panic during the throes of COVID last year and sat on the fence as stock prices soared into orbit! Here are a few simple tips for mutual fund investors to successfully ride out and profit from volatile markets.
Before you invest, aim to understand
The impressive recent SIP (systematic investment plan) industry figures may lead one to assume that the overall levels of awareness about the nature of equity returns are increasing too – but alas! Anecdotal evidence strongly suggests otherwise. Most new equity investors still harbour misplaced expectations about the way equity returns work, not realising that their portfolio values may remain below their invested amounts for extended periods of time, only to boomerang back to life when cycles reverse. If you balk at such non-linear growth, your risk tolerance levels are likely not aligned to equity investing at all; and you should either stay away from it, or make a better effort to understand and accept the inevitable vicissitudes that characterise stock markets.
Simply SIP-ping away isn’t enough – you’ve got to rebalance
“SIP it, shut it, forget it”, has been the resounding war cry of many advisors for the past few years – in particular, robo platforms that are incapable of delivering active portfolio management to their customers at an individual level. However, this may very well not be sound advice at all. This grossly oversimplified process falters on two counts. One, it prevents investors from capitalising on profit booking opportunities during times when markets are showing ominous signs of an impending correction. Two, it completely ignores the ‘behaviour gap’ associated with equity investing – if an investor panics and stops & redeems his SIP’s when his money slips into the red, everything is rendered moot! Instead of donning your “Zen” avatar and flowing with the markets come what may, work closely with an Advisor who can assist you with a disciplined rebalancing of your portfolio on a periodic basis. Once a year should be just fine.
Staying the course is vital – bad times are opportunities
“You didn't think it was going to be that easy, did you?”: this famous dialogue from the iconic Tarantino movie Kill Bill may very well have been written about the journey to wealth creation through equities! Go back to 2008 for a moment – many equity investors saw their hard-won savings eroded to one-third of their peak value within a year and a half. And within yet another year and a half, the index had captured its previous high once more! Net net, the investor who lived in a cave between 2008 and 2011, and forgot to stop his SIP’s as a result, would have been the most richly rewarded. The exact same story was repeated when mid and small caps caved by 60-70% in March 2020, only to double or even triple from their abysmal lows within just about a year!
The key lesson here when it comes to SIP’s is this: when things head south, buckle up and let your SIP debits take place with gritted teeth! It is the SIP tranches that hit depressed markets that carry the seed for maximum long-term wealth creation – hence, stopping your SIP’s just because “markets are bearish right now”, is akin to riding a supercar but decelerating every time you encounter an open patch of road. Remember, dispassion and courage are your two best friends during bear markets.