Stay focussed and ride out the pandemic
Renowned actor and martial arts icon Bruce Lee once said, “The successful warrior is the average man, with laser-like focus.” This adage holds true now more than ever. Investors have been in a tizzy with the Covid-19 pandemic wreaking havoc in the financial markets in the past six months. While the equity markets have seen their fair share of volatility, this is not the time to make hasty decisions and redeem investments in panic, making losses in the bargain. Instead, the key to weathering this storm lies in staying focussed and not losing sight of the bigger picture. Indeed, we have no control over the spread of the pandemic and its consequent economic fallout, but we do have the power to adopt a more prudent and long-term investment approach to tide over market volatility and make gains in the long term. Read on to know more.
Have faith and don’t panic
Equity markets across the world, including India, have seen sharp volatility in the past six months of 2020 because of the Covid-19 pandemic. While the markets have recovered quite a bit, most domestic and global equity benchmarks continue to be in the red based on returns for the year till June 30, 2020 (as shown below).
Performance of major equity indices on YTD basis
Source: Bombay Stock Exchange (BSE), National Stock Exchange of India, financial websites
Note: Year till date returns as on June 30, 2020
Having said that, such fluctuations are not the first of their kind. Volatility is inherent to the equity markets and there have been several bouts of negative performance during health scares such as swine flu (2009) and pneumonic plague (1994), economic downturns such as the Global Financial Crisis of 2008 and the Harshad Mehta scam of 1994.
Market downfall in the
Note – CAGR returns for periods more than one year, otherwise absolute, Data till June 30, 2020.
Source: CRISIL Research
Stay calm and invest systematically over the long term
Instead of reacting to the market downfall by selling investments in a hurry, investors should respond calmly. The chart shows returns in the shorter horizon are more jagged. They smoothen out as the investment horizon increases, with the 15-year period yielding the most stable returns.
Long-term investments iron out volatility
Source: BSE, CRISIL Research
Note: Rolling return averages pertain to the period between June 1994 and June 2020, even though the underlying index values pre-date that.
Staying invested for the long term plays a crucial role in attaining major financial goals such as retirement planning, children’s higher education and marriage, which typically have a longer gestation period and require a larger corpus.
Systematic investment plans (SIPs) in equity funds is the most disciplined way to stay invested in equities. While the chart indicates that SIPs have seen sharp wealth erosion in recent times, it is also true that the “the best view comes after the hardest climb”. Investors having the patience and ability to overcome the emotional biases of greed and fear during market upturn and downturn will enjoy a manifold increase in their corpus. As evident in the chart, SIPs in S&P BSE Sensex had given negative returns of 8.64% in the short run (one year). However, in the long term, investors have enjoyed positive returns despite multiple market phases in between.
Do not panic because of short-term volatility, this too shall pass
Note: Monthly SIP of Rs 10,000 is invested on the first day of the month in S&P BSE Sensex
SIP done on the first working day of the month
Market value represents the cumulative value of the underlying SIP investments
Data for the period ended June 2020
Source: CRISIL Research
Just as the day you plant the seed is not the day you eat the fruit, similarly, you will reap the fruits of your equity investments, if you stay invested for the long term. The key to achieving this lies in being patient, staying focussed and becoming immune to short-term volatility in the equity markets.
Disclaimer: Any comparison/data 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.
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