Keep Faith In Equities

The stock market has crossed the psychological mark of 18,000. The strong global cues and FIIs inflows gave the market the much required push and consequently both the BSE Sensex and CNX Nifty scaled their highest closing levels in the last 29 months. Not surprisingly, like in the past, there have been mixed reactions from investors to the recent stock market performance. While on the one hand there are investors who are happy to reap the rewards for reposing faith in equities over the last couple of years and are continuing with their investments, on the other hand, there are investors who are relieved to finally see their portfolio in the positive territory but are looking to redeem their holdings in equity funds. In fact, many of them have already started doing that. Then, there are investors who have been investing systematically over the last couple of years.

They are a happy lot as the disciplined approach to investing is showing encouraging results. In spite of a remarkable recovery in the stock markets over the last 15 months or so, investors’ response to equity funds has generally been lukewarm. It is a pity that only a small section of investors rely on equity as an investment option to build wealth over time. Unfortunately, short to medium term market movements continue to influence investment decisions of a large number of investors.  As a result, equities have not been able to find a permanent place in the asset allocation process of Indian investors. No wonder, every time the market drops, the confidence-building exercise has to be undertaken by the MF industry as well as investment advisors.

A classic example of how investors react negatively to market downturn was witnessed during the period September 2008 to March 2009 when even those investors who were investing systematically stopped their SIPs. No doubt, those were some of the most difficult months even for the most seasoned investors as well as for professional fund managers. However, to abandon equities is not only illogical but can also be detrimental to the long-term interest of investors. It is a well known fact that equity, as an asset class, requires long-term commitment and hence one has to not only stay invested for longer periods but also continue the investment process.

No doubt, tracking market volatilities can be quite challenging for investors. However, they need to keep faith in this asset class. It is important to remember that equities have the potential to not only beat inflation in the long run but also build wealth by making money grow at a healthy rate. Even the most volatile markets cannot undermine the long-term potential of equities.  Besides, a disciplined approach takes away the speculative element from the investment strategy and goes a long way in ensuring success. [PAGE BREAK]

Although making regular investments does not guarantee profits at all times, a disciplined approach ensures that one continues to buy even in down markets and benefit the most once the markets start moving upwards. On the other hand, those investors who do not invest on a regular basis often stay away from the markets during the turbulent times as they see a down market as a disaster, rather than viewing it as an opportunity to invest at lower levels.

It is true that even those who invest through SIP can suffer losses temporarily during the market downturn. However, the impact on their portfolio would generally be much less as they continue to invest at lower levels and that turns volatility to their advantage and bring their average cost down over time. Therefore, more money they invest at the lower levels, the lesser recovery they have to make to turnaround their portfolio performance.

For an equity investor to be successful, it is important to follow certain norms before starting the investment process rather than taking ad hoc decisions during the process. For example, one needs to assess one’s risk taking capacity as that goes a long way in tackling risks associated with equity investing. Another crucial factor is to diversify the portfolio adequately. Tracking the portfolio can go a long way in achieving the desired results.