Today, Iet me highlight few of the financial decisions which I undertook this year which has helped me ride the volatile market and plan my future needs.
But firstly, let me discuss the most common mistakes people commit during such times of crisis and in general while investing.
Let’s remember one thing, every crisis will not stay on forever. There is a system in which a market governs, when valuations stretch far beyond and various parameters to gauge the performance of the markets go haywire, it is bound to correct.
However, these variables fall in place and it is always the long-term investors who benefit the most as they have the simple yet uncommon categories in today’s world of being disciplined and patient.
We all know what markets have been through in the last few weeks.
Sensex and Nifty have erased all gains for this year and scenarios don’t look too optimistic going forward as well.
Therefore, taking this as the base, the first mistake I would like to highlight is that investors are putting an end to their Systematic Investment Plans (SIPs) during such volatile times. Investors should understand that SIPs are products that are designed in a manner to withstand the volatile times.
This is where the concept of rupee-cost averaging plays a key role. The number of units that an investor will get during such times will be quite large as compared to when the funds have been at a very hefty valuation.
The number of withdrawals in the mutual fund space have been massive (both by DIIs and FIIs) in the last month post the IL&FS saga.
In this scenario, investors should reflect on the goals that were set with the setting up of the SIP. With these goals in mind, they should know that if they stop with their SIP investment, they will be losing first on the compounding of the money part and also the goals are put on hold.
Here is a perfect example of goal-based investing
Besides, SIP develops a healthy habit of disciplined investing among investors. If a naïve investor discontinues with the SIP investment, they won’t be able to reap the maximum benefits of investing in this product.
Similarly, investors should also not stop the SIPs when the markets are overvalued.
The second mistake that I want to highlight is that of over-diversification of one’s portfolio to includes a large number of stocks thinking that the downside risk in such a scenario decreases drastically.
However, this might not always be the case. People who included more financial stocks post September believing that the sector cannot go bust had to face the brunt post the IL&FS crisis.
All financial companies (barring a few such as HDFC Bank, Axis Bank where the downside was limited) had to face the brunt especially the NBFC space, where we saw a sharp correction.
The third most common mistake is that of liquidating our investments in times of volatile or bear markets. The continuous downfall (as is the case of the market at the present moment) of the market can make an investor pessimistic.
Given this scenario, the investor would be tempted to redeem the investments. But, we must remain calm and not press the panic button at this critical juncture. We should always keep in mind the goals that we have and that needs to be met by the investments.
Therefore, we should not overburden ourselves by the bearish and bullish trend of the markets. Every bear trend is in the market is followed by the bull; resulting in the recovery of market from the lows as well as helping it scale a new peak.
Now that I have highlighted the common mistakes which once in a while every investor commits, let me highlight about few smart financial decisions which I undertook this year.
I did not press the sell button when it comes to my investments both in mutual funds as well as shares. Currently, I have three SIPs which have been running as mentioned below:
The mutual funds have been diversified according to the market cap and I have made sure to continue with the SIPs even during these volatile times.
The funds have corrected significantly in the last few weeks but it is only during these times that the optimum benefits of SIPs can be reaped.
|Fund Name||NAV (Mid-September)||NAV (As on 2nd Nov)||Comments|
|Reliance Large Cap Fund – Direct – Growth||INR 36||INR 34.40||Had got to a low of INR 31 during this period as investors started selling off, but the fund has almost reached the price as in September|
|Motilal Oswal Multicap 35 Fund – Direct – Growth||INR 28||INR 25||Got to as low as INR 23.5 during this period but given the marquee names the fund possesses, I have continued with the SIP|
|Kotak Emerging Equity Scheme – Direct – Growth||INR 41.5||INR 38||Investors panic selling got the NAV to as low as 35.7, however it has recovered and now I expect that most of the downside in the mid-cap has already taken place. So the trajectory looks good ahead.|
One common link visible in all these funds is that they all have corrected from the significant lows of mid-September, which suggests that the investors who did not have the patience to withstand the fall have now to lose out on the potential upside the funds have to offer.
It is said that one way to beat the market is to predict what is in store in the future. However, it is not always easy to do so.
But until and unless your thought process is backed by solid rationale then it becomes possible to anticipate what might be in store (But let us remember this situation only happens when someone has a sound knowledge and has been following the markets since a long time). Let us now discuss this point in detail!
Earlier this year, we saw the IT and Pharma stocks, in particular, performing exceedingly well as compared to the broad markets.
IT Sector Performance over the Years, Its Revival, and 2 Top Sector Funds
If a savvy investor were to look at the happenings worldwide, then they could have predicted that this was on the cards. IT and Pharma sector companies gain maximum revenue from North America (more than half of the revenue).
The hawkish stance of Federal Reserve was witnessed wherein foreign investors left the emerging markets shore and started with their investments in USA.
This actually posed a significant pressure on the rupee which fell to its historic low this year.
Coupled with this, was the rally in oil prices by more than 50 percent. This led to inflation concerns and it was a double whammy for INR. This situation was apt for buying stocks of IT and Pharma stocks.
One could anticipate both events as Fed was clear on its stance of raising the rates (at least raising the rates thrice this year) and given the Iran sanctions coupled with supply disruptions in many other Arab countries such as Turkey, oil prices shot up.
This actually made me earn handsome profits even during such volatile times. These stocks are still included in my portfolio as I made sure to buy more of these stocks when the prices corrected significantly, as a result, decreasing my average price for the stocks.
Some stocks that were bought namely are Infosys, HCL Technologies, Mphasis, Sun Pharma and Aurobindo Pharma.
Investing is an integral part of an individual’s life, but at the same time getting insured should be the topmost on the priority list.
Sadly, most people underestimate the importance this product holds in an investor’s portfolio. We should keep in mind that this is not an investment product that will reap maximum benefits for us, but it will act as a cover for our family in times of emergencies.
It is because of this that as soon as I received my first salary slip, I got a term insurance plan. As I am into the early 20s, the amount that I will have to pay as premium is comparatively low.
But let me warn you as investors postpone this product more and more, the premium that needs to be paid every year also increases drastically.
Therefore, it is apt for us as investors to get covered under a term insurance plan as soon as we are employed. (I took a cover of 25 lakhs and will need to pay around INR 3500 as the annual premium and the period of the insurance cover is 35 years.
Please also note that in a term insurance plans the premium which we need to pay gets locked in for the entire period of the insurance cover.
For example: If I buy an insurance policy of 25 lakhs at the age of 22, I will need to pay INR 3500 as an insurance premium for the next 35 years. This premium increases as our age increases)
An investor, therefore, can take a clue from these financial decisions and not necessarily buy similar products. However, they should ensure to make informed choices about their key investments in the future based on their goals and risk appetite.
Disclaimer: The views expressed in this post are that of the author and not those of Groww