March 2020 saw the biggest market fall since the global financial crisis of 2007-08. The month saw a drawdown, or drop from the market peak,  of about 27%. Most, if not all equity investors have seen their portfolio lose a significant chunk of gains and for those who recently entered the markets, a significant chunk of their invested capital.

While April saw a respite and the drawdown dropped to 18%, early numbers from May show that the trend is turning negative again. That’s volatility for you!
 
This is not a situation being faced just by Indian investors but almost in every market that has a stock exchange. The main culprit that is being blamed is the COVID-19 pandemic.
 
In general, fear and uncertainty are at an all-time high. The India VIX or volatility index is at its highest point in a decade. This is a critical phase that is likely to have a huge impact on wealth creation for equity investors. This is why most investors, especially those investing in equity mutual funds would be asking themselves, “what should we do now?”
 
A. For the money that you have already invested
 
Money invested in equity is money you should not need in the near future. This is an informal yet cardinal rule of equity investing or for that matter investing in any volatile asset class.
 
Withdrawing now, especially from equity mutual funds, is a less than optimal move. Market falls, so far, have been temporary. No one would invest in the asset class in the first place if it was a permanent thing. 
 
Mutual fund investors should note that the MF units they hold are representative of the best of the economy. They didn’t get there without seeing a market crash and economic slowdown or two.
 
Stay invested and stick to a reasonable asset allocation depending on your goals and objectives.

If your SIPs are invested in equity funds that have a history of consistent performance and these funds are aligned to your objectives, continue them. The market fall means that you would be getting more units for the same amount of money. This will have a significant impact once the market recovers over the years.
 
B. For any surplus, you might be sitting on
 
I don’t recommend opportunistic buying. Those who think they have timed the market bottom have been proven wrong before. The best approach is again to stick to your asset allocation based on your long term and short term objectives and invest the surplus in the same proportion.
 
C. Asset allocation – how to approach and ensure that it is in line with your long term goals
 
This may be a good time to revisit your asset allocation and assess whether it was aligned to your real financial goals or was it just aimed at investing in whatever was giving the best returns?
 
When you align your asset allocation to your goals, you select the asset class based on the time horizon and final value of the amount you intend to reach. If the goal is ten or more years away, inflation is your biggest challenge and thus you select equity as that has consistently beaten inflation.
 
Similarly for short term goals, you select fixed income-based investments that are stable and secure. You should also always have an emergency fund in liquid investments that can help you tide over any loss of income or emergency requirement for a period of 6 months at least.
 
If you have complex goals, take the help of advisors to decide what is the best asset allocation. Rather than simply being aggressive or conservative, invest according to what you will actually need. This means allocating your savings such that your goals are covered.
 
D. What to do with current SIPs
 
If your SIPs are invested in equity funds that have a history of consistent performance and these funds are aligned to your objectives, continue them. The market fall means that you would be getting more units for the same amount of money. This will have a significant impact once the market recovers over the years.
 
E. Direct equity/ foreign stocks/bitcoin – where is the quick money
 
For the rational investor, equity mutual funds offer the best option because you can’t predict which firms will do well and holding a portfolio that has been objectively selected by credentialed and time tested professionals is the more logical choice.
 
Quick money is for speculators and that is pretty much the same as gambling with similar odds of fortune or ruin.
 
F. Fearful – should you sell everything and move to a PSU bank FD
 
A 30% fall is no reason to suddenly consider equities worthless. The Indian markets have recovered from 50% plus drawdowns and over the long term, we are confident of the Indian and global economy to recover from this, even if changed.
 
Bank FDs, albeit of reliable banks,  are great savings products for short term investments. Over the long term though, their post-tax returns have historically stayed at par or below inflation. This means that they are not going to really help you create wealth to meet your long term objectives. Remember that crises come and go, but your objectives are your own and need a long term approach.

This article was first published in Outlook Money on 10th May 2020.