While the stock markets have been volatile for a few months, individual investors have invested in equities through mutual funds. Inflows in equity-oriented mutual funds through systematic investment plans (SIPs) have surged despite frequent bouts of market turbulence, clearly indicating that investors are sidestepping the behavioural weakness that emerges during volatile market phases.
The equity market is generally volatile over the short term. However, long-term investment in the equity market will lower the risk of near-term volatility. Here are four steps to keep in mind to invest during volatile times.
The first step to successful investing is to outline the investment objective. This helps you shortlist the investment instruments best suited for achieving your financial goal. For long-term investing, investors must have pre-requisite goals in mind such as buying a house, higher education of children or retirement, and their decisions should be based on building a portfolio that will help them achieve these goals. Investors must realise that in a goal-based investment with a multi-year time horizon, market volatility is your friend.
Even legendary investor Warren Buffet with his investing record spread over multiple decades has seen drawdowns-temporary losses-of over 50% many times. When investors take investment decisions based on market sentiments, then they are prone to higher amount of losses. A long-term investor can reverse losses by having patience and thus overcome short-term losses. So, investing over the long-term is one of the few smart ways which can help achieve your financial goals.
Long-term investment in equities lead to higher wealth creation because of the compounding capital as the returns are reinvested into one's principal amount. The longer you invest, the more time you give your investment to grow.
Experts say investors should stay patient through the short-term peaks and troughs of the market to realise the true potential of their investments in the long run. In fact, an analysis of CRISIL Equity Fund Performance Index over the past 15 years to June 2019 showa that the probability of negative returns declines as the investment horizon increases.
Avoid knee-jerk reactions
During markets volatility, investors should avoid knee-jerk reactions and not sell their holdings. On the other hand, investors must make active use of corrections in the stock market to do cherry picking. Buying more stocks when the prices are low will help to bring down the overall average price for the shares. Investors must reassess and invest in scripts of fundamentally strong companies. Mid-cap and small-cap stocks can become very volatile and see higher corrections. It is better to stick to large-cap stocks because of their favourable valuations and the capacity to withstand slowdown in the economy.
Look at mutual funds
With mutual funds, you can invest through SIPs by investing small sums of money every month over a period of time. As an SIP is meant to tide over volatility in the markets, the longer the investment horizon the better it is. If you start out young, equity funds should constitute around 80% of your portfolio as this asset class has been found to be the best bet for growing money over the long term.
Balanced funds from asset management companies are ideal during markets volatility as they are less risky compared to pure equity funds. These funds invest over 65% of their corpus in equity and the remaining in debt and cash. There are funds that follow asset allocation model to generate lower volatility returns. In fact, first time investors should start investing in mutual funds through balanced mutual funds as they are less volatile compared to other equity diversified equity schemes. Balanced funds can also help retail investors create huge corpus with SIPs.