By: Tavaga Research
Global and Indian markets have been hit hard due to the coronavirus crisis. About a few months back nobody hadn’t even heard about such a virus, it is a black swan event. The spread of the virus has triggered panic across the world shaking the confidence of investors; the damage caused to most portfolios is far worse than seen in the 2009 crisis. What we are dealing with right now has no historical comparison whatsoever, no one has an idea of how the problem is going to play out causing a huge uncertainty.
Previously, only the equity and debt markets were impacted by the Covid-19 panic; now the commodities and currency market is in turmoil due to the crude oil war. Although investors can get some comfort that other markets have fallen as well, the Organisation for Economic Co-operation and Development (OECD) has halved the global gross domestic product (GDP) growth projection for 2020 due to Coronavirus.
After a crash of this magnitude, a question of the recovery of market confidence arises. Most confused investors are one whose money is parked in mutual funds and especially through SIPs. What Mutual Funds essentially do is take your money and divert it to a common pool — with funds mobilized from other investors like you and invest this corpus in handpicked stocks to offer you outsized returns.
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Investing in stocks can be a ridiculously tedious affair and a mutual fund is a pretty decent alternative for a lot of investors. But obviously ‘Mutual fund investments are Subject to market risk’ and that has a lot of investors facing losses on their equity mutual fund investments and are uncertain of what should be done.
What to do with SIPs?
Data from Securities and Exchange Board of India (Sebi) shows that net investment in Mutual Funds was Rs. 39,478 crore in equities in the period of January to june 2020, which is significantly higher than investments in the same period in 2019 which stood at Rs. 8,735 crore
Among mid-caps, it is necessary to restrict to companies that have low debt and the ones that generate free cash flows. Whereas large-caps fall in quality is limited and they have corrected more than 20% now, creating a margin of safety there.
What you should be doing with your SIPs is based on the circumstances you are in at this very moment. Here are few scenarios and the actions you can take on your SIPs
Income uncertainty
If your regular income is in any way at risk, you should focus on building up your emergency fund if not already in place. Make sure you have enough savings set aside to cover for six to twelve months of your expenses including any EMIs. It’s best to move your mutual funds till date to a short term debt fund or a high yield savings account and pause SIPs in equity funds which are highly volatile in the current market conditions for the time being.
Short term goals
If you made investments via SIP for a short-term goal which is coming up soon, your best option is to systematically move out equity fund SIPs and manage portfolio risk by investing in secure options like bonds and money market instruments, this will ensure your principal is safe if not achieve returns as high as equity funds.
Striding through the economic conditions
If you are a long-term investor with a secured and regular income, it’s good to stay the course and wait patiently for the market to correct as in the long-term investments almost always outperform the market. The S&P Index has witnessed losses in only 10 of the 45 years from 1975 to 2019, making stock market returns quite explosive in shorter time frames; although investors have usually encountered a much higher rate of success over the longer term.
Looking for the upside at the moment? Continuing your SIPs will benefit your portfolio by the way of accumulating more units when markets are down, bringing down your average cost of acquisition.
Starting SIP in equity funds now
Now that market levels and valuations are back to where they were four-five years ago. It is a good time to deploy it aggressively if you have surplus funds and have taken care of your emergency fund. One thing to always remember is to align your investments to your risk profile, investment horizon and goals. As a general rule, equity investments should be made with an investment horizon of at least 7 to 10 years. Large caps are less risky than mid caps for instance, when the small-cap index was down 35 per cent from their tops, Nifty was making new highs which might suggest that it’s better to invest in large cap.
Uninterested in the uncertain piece of cake
If continuing your SIPs are a stretch for you and is constantly stressing you out, it’s okay to pause your SIP for the time being and build liquidity instead. When your regular income is uncertain with market conditions being out of your risk appetite a decision to not continue with equity investments is a sane option; you can consider diverting the funds earmarked for equity to less volatile asset classes. After the uncertainty passes you can resume your SIPs and catch up to ensure your long-term goals are unaffected.
Looking at that shiny metal everyone is suddenly talking about
Gold exposure reduces the volatility of a portfolio and experts recommend an allocation of 5-10% in an individual’s portfolio. If you are under weighing on gold there is no reason why you shouldn’t add more now. The best way to invest in gold is through gold ETFs or gold bonds. Gold has already rallied and almost all of the fear premiums are priced in. Since global gold ETFs are very liquid, there may be profit booking if the price continues to move up.
Gold Price over the course of last year (2019-2020)
Redemption of Investment
Only in extreme situations should you consider redemption of investments; if you aren’t going to need the money, there is no point in booking a permanent loss. Your best call to action is to earn returns and maintain capital protection amid market fluctuations.To be in a position to reap benefits when markets bounce back, it is important to remain invested. Instead of focusing on the risks, assess if you have enough time for the economy and markets to rebound and compound to work for you.
No matter where you stand, you need to have the patience and temperament in dealing with these uncertainties where no one knows the market bottom or top is. Clenching on to your nerves is challenging when you witness markets trembling to new lows. Committing to an SIP gives your portfolio the chance to benefit from the volatility.
Our last thought here is to not change your investment strategy in periods of uncertainty unless your financial circumstances have changed.