Combating Equity Market Volatility

The equity market is driven by two emotions – greed and fear. The latter seems to be at play in the domestic equities currently. The recent bedlam seems to have spooked investors, urging them to exit the market. To avoid ill-timed exit from the equity market, we have detailed below techniques that can help stay the course through ups and downs.

Stay invested for the long term

Short-term rallies are par for the course in the equity market. Don’t let them scare you. Stay focused and invested for the long term as it enhances the chances of optimising returns and reducing risks. For instance, the S&P BSE Sensex has returned average 20% for the one-year daily rolling return period since its inception in 1979 till August 31, 2019. However, this average includes periods of loss; the loss probability (count of negative returns / total number of returns) is as high as 28% in this short-holding period. However, as the investment period expands, we see reduction in probability of loss in a holding period of 15-20-year rolling basis. Hence the investor shall always focus on the long term investment in order to aim to generate returns.

Increasing investment horizon results in return optimisation

Source: BSE

Notes: Past performance may or may not be sustained in future. Daily rolling returns of S&P BSE Sensex since inception (1979) considered across various periods. Data for the period ended August 31, 2019

Opt for systematic investments

Investors would be better off in the long run by investing systematically (systematic investment plan or SIP) to derive best benefits from the markets. In basic parlance, a SIP is similar to a recurring bank deposit; investors contribute a fixed sum of money at regular intervals. SIP negates the risk of market timing, averages the cost per unit and adds discipline to investments over the long term. Multiple benefits have enhanced the popularity of SIP among retail investors in recent years, as is evident from SIP inflows of Rs 2.37 lakh crore from April 2016 to July 2019.

CRISIL Research’s analysis reveals that SIP investments have generally done better than lump sum returns in most bear phases. For instance, during the sub-prime crisis (January 2008 to March 2009), when the global markets toppled ~45%, SIP investors’ returns were negative, so also during the European crisis i.e. during January 2011 to June 2013 (SIP returns of 5.60% were more than lump sum returns of -2.21%). During the bull run, there have been instances of a sharp bounce-back after the sub-prime crisis (April 2009-December 2010) - lump sum returns were more attractive at 51.58% than 28.76% SIP returns. However, in the post European crisis during July 2013-February 2015, SIPs returns (31.51%) benefitted more than lump sum returns (27.60%).

The clinching deal for SIPs came in the cumulative period since 2008 till August 2019 when point-to-point CAGR returns were just 5.36% versus XIRR returns of 9.76% through the systematic route, thus showcasing the dividend of disciplined and regular investments by investors. Investors can optimise SIPs over the long run, helping reduce risks from volatility in the underlying market and aim for shoring up returns.

Investors with lump sum can invest via STP

Investors with lump sum money and wanting to invest in the equity market, while not risking timing the market, can go for systematic transfer plan (STP). In this, investors invest their money in a debt mutual fund, mostly liquid funds, and transfer money from that fund on a periodic frequency to an equity fund of their choice. By doing so, they may not only generate money from their investment in the debt fund, but also aim to reduce the risk of timing the equity market, rather investing systematically in an equity fund. Debt funds can also be an option for the investors to park money in the short to medium term. For short-term goals and low risk appetite, investors can consider investing in debt funds such as overnight, liquid, ultra short-term, and money market funds.

Summing up

An equity investor cannot escape market volatility. Hence, it is best to avoid the herd mentality and be rational. Patience is the panacea. One of the best ways to overcome influence of the crowd is to focus on an investment strategy which is in line with individual financial goals and risk profile.

Investors shall always refer to the Scheme Information Document and Key Information Memorandum of the schemes carefully to understand the investment objective and associated risk factors of the scheme before investing.


Any comparison mentioned in this material is for general information only and not intended to be relied upon as investment advice and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. Information and content herein have been provided by CRISIL Research, a Division of CRISIL Limited, and is to be read from an investment awareness and education perspective only. Recipient are advised to seek independent professional advice before making any investments. The views / content expressed herein do not constitute the opinions of SBI Mutual Fund or recommendation of any course of action to be followed by the reader. SBI Mutual Fund / SBI Funds Management Private Limited is not guaranteeing or promising or forecasting any returns.

Mutual Fund investments are subject to market risks, read all scheme related documents carefully.

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