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Planning to redeem in this correction? Think again.

Should you now stop investing and wait for the bottom? You could, but for that you would need a crystal ball to tell you exactly where the bottom is.

Did you know, 11 years ago in 2008, when the domestic equity markets started correcting, they didn’t stop till the benchmark indices had lost more than 50% of their value, and that too in a span of 8 odd months?

The Nifty 50 index corrected 59% from its peak in January 2008 to the bottom in March 2009, at the same time, the Nifty 100 was down 61% and the Nifty 500 fell 64%.

Let’s look at where we are today. At Nifty of around 11,250 we are 80% higher compared to the peak of 2008 and almost 3.5 times higher compared to the bottom seen in 2009. 

Should you now stop investing and wait for the bottom? You could, but for that you would need a crystal ball to tell you exactly where the bottom is. In the absence of such super powers, one can do what common sense says is the best path, continue regular investments with the knowledge that you will invest some when the market does hit a bottom.

If you only invest when the market is moving higher, your gains will look limited. It’s when you invest in a downturn, that your average purchase price moves lower, hence, you see a better gain when you withdraw.

Stay the course

The real benefit of systematic investment plans (SIP) that mutual funds offer, is the continued investment when markets fall. Just don’t stop or pause your SIP. Buying more at lower prices, means that you will gain more when the cycle turns. 

If you only invest when the market is moving higher, your gains will look limited. It’s when you invest in a downturn, that your average purchase price moves lower, hence, you see a better gain when you withdraw.

Here is how it works:

Let’s say you have a Rs 1,000 SIP in an equity fund. Last month, the net asset value (NAV) or price of the scheme was Rs 20, you got 50 units for your SIP. This month, post the correction, let’s assume the NAV has fallen by 10% to Rs 18, you will get 55 units (rounded off) for your Rs 1000 SIP. But instead of continuing the investment you are spooked by the 10% fall and you redeem. You then wait till the NAV goes back up to your purchase price and then sell. Here is what your pay off will look like if you sell too soon; please carefully consider Scenario 1 and 2.

Don’t forget

Equity investing is a long-term commitment. Link only goals where you have 7 years or more to equity investments. In your chosen period, not only should you remain invested but you should continue regular investments to take advantage of lower prices in market downturns.

Only when you are a year or two away from your financial objective should you think of shifting funds from equity to a more stable return option like fixed income. That is the time you sell equity and not just when the market corrects.

Quality is important when you are choosing where to invest, all assumptions on returns rely on choosing good quality funds. If you are not confident of doing that, take the help of an experienced and qualified advisor.
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