Today the equity markets are in apparent free fall. Many stocks have fallen by more than 20% and the Nifty index itself has fallen by about 7% in just 3 days. Technically a correction is one, wherein the markets fall by at least 10%. Whether your investment in regular plans of mutual funds or mutual fund direct plans, the correction is the same!
Equity correction is not uncommon
And how rare are such equity correction? They come on the average about once a year! We witness a 20% fall once every few years and a massive ‘sell-off’ of 30% happens every decade or so. These falls just happen and there is no way to avoid them.
Question is, how do we deal with them? The first thing to understand is that the long term expected returns on equity is about 15%. Long term is a time horizon of 7-10 years or more. It takes that much time for a business cycle to turn.
In this period there will be peaks, valleys and lots of sideways movement.
We have been advising our clients for a few months, about the need to avoid volatile funds such as mid-caps. The Nifty PE crossing 27 was also something worrying us and we maintained that while SIPs are ok, it is better to avoid large lump-sums in volatile funds.
Why have the markets corrected?
The reason for the recent corrective movement in the stock markets (An Equity Correction) is largely a development in the US markets. The US interest rates are expected to increase because the central bank (Fed) there is likely to respond to the economy heating up and causing high inflation. They try to balance high inflation vs high-interest rates. If interest rates go up, then companies are expected to pay a higher cost for raising money which means their growth and profits might get impacted.
What does this mean for Indian investors in their investment?
Indian markets are not immune to these developments and the markets have corrected in line with global markets.
Implication #1 – Indian Markets Has Robust Future
For Indian investors, it is important to note that our economy has strengthened with structural reforms. Earnings by Indian companies are set to pick up. However, in the short run, there will be volatility.
Our goal as an advisor is to help you tide over these tough periods of investment. Ensure that your portfolio remains steady. As a fiduciary and zero commission advisory, our incentive is your portfolio growth and net commission income. This is not linked to the ‘Assets Under Management’.
Implication #2 – Keep Long Term in Mind
The current developments might entail some short term pain, but the long term will be much better. Any losses that you suppose, are only notional and you must stay put for long term goals. Good businesses will continue to perform well and sell their goods and services to a growing market.
Implication #3 – Don’t Panic and Withdraw Early
Do continue your SIPs (Systematic Investment Plan) so that your long term goals are not affected. A dip today means that you are getting to purchase units and stocks at a 10%-20% discount compared to last week! A dip or a correction is the right time for a prudent investor to look for a bargain in the market. While some may say that you may catch a falling knife, please be aware that markets, in the long run, move only upwards.