Friday, December 06 2019, Contributed By: NJ Publications

It is a fact that the equity markets have not been performing well in recent times. This is not at all surprising as history shows us that the markets are and will be volatile in the short-term. However, there are likely many new investors who have entered equity markets only in the recent past, especially through the mutual fund SIP route. It may not come as a surprise that some of these investors may be feeling a bit worried about the short term performance of their equity funds. In this piece, we will talk about some basic investing principles which would help calm the nerves a bit.

Should you look at short-term SIP returns and worry?

Since you have invested in an equity mutual fund scheme, we assume that your investment horizon would have been long term or related to any long term financial goal. In personal finance parlance, long term is considered a minimum of five years.

It is important to understand that nothing is wrong with your choice of investment for the time horizon you have chosen. You just need to understand that the markets will go up and down, especially in the short term. That is their basic characteristic. It is only in the long run that you will see an increasingly consistent rising graph or upward movement. On the positive side, you may even be happy that the markets have not rallied, as you are now buying stocks at relatively lower price consistently through SIP. That is, in fact, one of the primary advantages of investing through SIP.

Almost every expert knows that the equity returns tends to follow the nominal GDP growth rates (i.e, the real GDP growth rate + inflation figures) in the long-term. With the Indian economy expected to grow at 7% + (real GDP) over the next few years, markets will eventually catch up and deliver positive returns. Hence, investors should not worry about lower or even negative returns in the short-term and continue their SIPs confidently.

Should I look to change my schemes?

Again, the performance of any fund or a fund manager can only be made over time. One year or less is too short a time to comment on the quality of fund management. If one particular scheme is not doing well today, shifting to another well-performing scheme will not guarantee you high returns. All returns and performance are historical in nature and hence will not matter much. Also, shifting between schemes with similar investment objective and investing in the same category/nature of stocks will not improve your portfolio much as the underlying universe of stocks will likely be similar.

What is more important in any portfolio composition is whether there is proper asset allocation and diversification. You should check whether your asset allocation is right for your investment horizon or risk appetite. Next, you could also see if your equity investment is appropriately spread into large, mid or small-cap investments – again as your profile and need. Frankly, we would strongly advise you to consult a proper financial advisor /distributor to construct your portfolio appropriately.

How long should you continue your SIP investments?

The best way to look at a SIP is by mapping or allocating your SIP to some life event or financial goal. For eg., higher education for your child, retirement plans for self, purchase of a second home, and so on. Even if these goals are over 10, 20, 30 years afar, an SIP route will deliver the best likely returns from amongst all asset classes. Given the importance of your financial goal, you should not stop any SIP linked to it as it will directly compromise the success of your goal.

If you do not wish to link your SIP to any goal, we would suggest that the life of any SIP should be at least 5-7 years for it to deliver good returns. Having said so, an SIP can be closed at any point of time – whenever you may need money. A new SIP today must be at least 5 years long.

Should I invest more money in equity funds?

This brings us back to basic questions – what is your investment objective, time horizon, risk appetite for this investment? And also most importantly, what is your present asset allocation? Once, these facts are known, you will have your answer. Broadly speaking you should invest if, your asset allocation in equity is low or your investment objective is to create wealth, the time horizon is long term and your risk appetite is aggressive.

Independent of above things, one is always advised to invest in markets which are not performing well or in other words, the valuations are relatively low. If you have an SIP you should consider increasing the SIP amount periodically – say half-yearly or yearly. Step-up SIPs are now available in the market which automatically increases your SIP amount at a set frequency. This is a more logical thing to do and also ensures that your savings grow along with your income over the years. Perhaps one should approach a good financial advisor to guide you on your fresh investments.

As smart investors, we also need to understand that fall in markets do give an opportunity for new investors to enter the market. Unfortunately, in India experience has shown that most investors enter markets when the returns are 30%-40% over the past year hoping that they too will make easy money.

In the end, we would suggest that a new investor should seek the help of a good financial advisor /planner to guide him/her in his investing journey. If you are investing directly on your own and are worried today, we would strongly suggest that you gain more knowledge and understanding on how the markets and investments work and even seek guidance, if felt required.

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