Only tactical investors lose money in a downturn due to their short investment horizon
With the Sensex down 20.64 per cent since the closing peak of January 29, 2015, investors, especially those who entered the equity markets for the first time in the post-election rally, are experiencing a lot of pain. But, panicking now would only hurt them further. Some tips on what they should do to survive this downturn.
Ignore volatility: Investors need to learn to ignore volatility – a part and parcel of equity investing. “If your investment horizon is long and you have made sound investments in a diversified portfolio, do nothing,” advises Amar Pandit, founder and CEO, My Financial Advisor.
According to Manoj Nagpal, CEO of Outlook Asia Capital, only tactical investors lose money in a downturn due to their short investment horizon. “Longer-term investors can just stay invested and ride out the downturn.”
This piece of statistic should reassure investors. “If you had invested in the Nifty on any day in the past 20 years and stayed invested for at least seven years, you would never have made losses,” says Kaustubh Belapurkar, director of manager research, Morningstar India. A long investment horizon is, thus, the best antidote to volatility.
Avoid market timing: Don’t exit the markets now, thinking you will get back in time for the next rally. It has been proven time and again that no one can time the markets to perfection consistently. The best course during a downturn is to stay invested. Nagpal says people try to time the market because they believe it is the smart thing to do. “Our experience says it is not smartness, but discipline that leads to wealth creation,” he adds.
Continue your Systematic Investment Plans (SIPs): Rupee-cost averaging (the purchase of more units at lower prices) boosts long-term returns; so stopping your SIPs during a downturn is the worst thing you can possibly do. “An SIP of one or two years won’t always fetch you positive returns; so you must run it for at least 5-10 years,” says Nagpal.
Rebalance portfolio: The weight of equities declines in your portfolio during a downturn. If you have the risk appetite, deploy more of your fresh money in equities and benefit from the lower entry prices. Do so gradually over the next three-to-six months. Only capital that will not be needed over the next five years should be deployed. Don’t invest borrowed money.
Reduce exposure to mid- and small-cap funds: Ideally, 50-70 per cent of your portfolio should be allocated to large-cap funds and 20-30 per cent to mid- and small-cap funds. Owing to the run-up in mid-caps over the past two years, the weight of these funds would have increased in your portfolio. Pare your allocation to these more volatile funds.
Don’t redeem now when net asset values have declined so much. “Allocate fresh money to large-cap funds to reduce exposure to mid-and small cap funds,” Belapurkar adds.
Invest across investment styles: Instead of investing only in growth funds, have some exposure to value and dividend yield funds, which invest in low-beta stocks and hence are more resilient during a downturn. “A 15-20 per cent allocation to these funds will help protect your capital to some extent,” suggests Belapurkar.
Diversify internationally: To reduce country-specific risk, invest at least 10-15 per cent of your equity portfolio in international funds. Do so via globally diversified international funds. US-focused funds, which invest in US-domiciled multi-national companies, are another good option.