Carry On Investing

Stock market declines are a natural phenomenon and every investor has to face uncertain periods from time to time. The current downturn, therefore, is no different. While the dream run in the stock market over the last few years led everyone associated with the stock market to believe that stock prices would continue to go up, the fallout of the global events in the last 8-9 months leading to the sharp falls came as a bolt from the blue for them. Needless to say that it is not the correction itself but the level of correction that has made many investors jittery.

In fact, it will not be an understatement to say that the turbulence in the stock market has been giving investors a harrowing time. As the Sensex has plunged around 60 per cent, the impact is clearly visible by way of varying degree of declines in the NAVs of equity funds. As a result, mutual fund portfolios of investors reflect a completely different picture compared to the beginning of January 2008. Though mutual funds are a diversified investment vehicle, they still have to bear the brunt in a falling market. However, a diversified fund with a good quality portfolio can ensure that the fall in the NAVs is lesser than the market.

While a rising market tends to make investors complacent, a declining stock market raises too many doubts in their minds often resulting in many of them abandoning their well thought out investment strategies. In a rising market most investors have only one question to ask: What should I buy? In a declining market, however, the fear takes over and that creates self doubts in the minds of investors. It is quite common to see investors grappling with doubts such as: Should I sell my entire holdings and move to cash? Is this a great buying opportunity? Should I redeem my holdings now and re-invest just before the market turns around? How long is this downtrend going to last?

If one were to analyse the stock market falls of the past, it would be apparent that these falls vary in intensity, length and frequency. While market declines in most instances present an opportunity to find out how fool-proof is your investment process, many investors fail to do so as they press the panic button. For existing investors, the best way to handle these declines is to stick with their investments provided they are sure about the quality of the portfolio. At the same time, it is vital to realign the portfolio by moving your investments from non-performing funds as well as those that took you beyond your defined risk levels in the market frenzy to those funds that have the potential to provide you better results as the markets start the recovery process.[PAGE BREAK]

An asset allocation strategy requires a commitment to keep a certain percentage in the respective asset classes like equity and debt, irrespective of the current market situation. For those who have been investing systematically, they need to carry on with their investment process. In the long run, it is the quality of the portfolio as well as the disciplined approach to investing that will determine the level of success. It is important to know that around 90 per cent of the investment success is achieved through these two factors and the remaining 10 per cent from market timing. Unfortunately, many investors spend 90 per cent of their time and efforts in timing the market.

For new investors who may like to begin their investment programme in the current market situation, the focus still has to be on the right asset allocation and on identifying funds that suit their risk profile. Some investors make the mistake of investing mainly in those schemes that witness the steepest falls thinking that they can maximise their gains during the recovery process. The truth is that in the current market situation some of the funds like mid-cap, small-cap as well as sector funds suffer the most. A sensible approach would be to spread the risk by investing in a carefully selected mix of funds.

Remember that the key to becoming a successful equity fund investor is not to allow the current market situation to drive your long term investment strategy. While the current market situation may not be conducive to show exuberance, there is certainly no need for serious long term investors to press the panic button.