Keep Faith In Equity Funds For Long-Term Growth

Equity markets have remained volatile amid geopolitical tensions, testing investor patience. Instead of exiting, staying invested, following a goal-based approach, rebalancing portfolios, and continuing SIPs can help navigate downturns effectively while benefiting from long-term growth and compounding. 

The last 18 months or so have been quite challenging for Equity Funds investors. First, on account of time correction and now price correction due to the on-going Iran war, that has impacted equity markets due to a spike in oil prices, supply-chain disruptions, and global uncertainties. While a current market like situation often triggers sharp volatility in the stock market, history shows that it rarely changes the long-term trajectory of the market. However, such a scenario tests the patience and perseverance of investors as they face some dilemmas with regard to the impact on their portfolio and how to manage the situation. Here are some of the dilemmas faced by investors and how these can be tackled by them: 

Why not exit now and re-enter when the war ends? Although a steep correction in the market can baffle even experienced investors, it pays to stay invested. That is because over the longer-term volatility tends to work itself out due to the offsetting of bad years against good years. Therefore, you must not disrupt your investment process with an intent to restart after the war ends, as it is very difficult, if not impossible, to predict short-term market movements with perfection. 

Will a goal-based investment approach help me tackle downturns? One of the key factors that contributes to how your portfolio performs over time is to stay invested for your defined time horizon and continue your process uninterruptedly. While it can be challenging to tackle market volatility, a goal-based investment strategy allows you to not feel compelled to make abrupt changes to your asset allocation.  If you are one of those investors who did not start investing by aligning your investments with your goals, you must do it now, as it will give you a clear indication of what to do with your equity fund investments. 

Do I need to rebalance the portfolio? A balanced portfolio, in terms of exposure to different segments of the stock market, ensures the right balance between risk and reward. It is quite common to see investors well. This often results in a very high exposure to aggressive categories of funds like sector, thematic, and Small-Cap funds. Although these funds do have the potential to improve overall portfolio returns, they also have the tendency to fall more during market downturns. If you have a portfolio with a higher exposure to these categories of funds, it would be prudent to realign the portfolio by pruning the exposure and allocating that money to diversified categories of funds such as large and midcap, flexi cap, and multi-cap funds. 

Should I begin investing thru SIP at the current level? If you are an investor who is looking to build wealth over time, you must remember that investing is a process and not a one-time activity. Therefore, the right strategy would be to follow a disciplined investment approach, as it invariably allows you to get the best from your equity fund investments through 'Rupee Cost Averaging'. 

If you decide to invest thru SIP, there is no need to allow the current market situation to come in the way of starting that process. The very purpose of investing thru SIP is to avoid timing the market and benefit from 'averaging' by investing at different market levels. Hence, if you intend to invest for long-term now in a disciplined manner, go ahead and do so straightaway. 

While starting the process with a clear idea of your time horizon is important, it is equally important to ensure that you step up your investment amount every year in line with the increase in your income. This will go a long way in your portfolio benefitting from the 'power of compounding' and ensuring discipline in your savings and investment process.