These are difficult times. With Covid-19 spreading across the globe and markets crashing, people are scared about their health as well as investments. Knowing that investing in markets is subject to risks and experiencing a market crash are two separate things. During such times, thousands of questions can cloud your mind,” Should I sell my mutual funds now even if it means booking a small loss? Or, stay invested? Is this a good time to buy since the markets are down? “, and so on. Today, let’s look at some facts and figures to help you make a decision that best suits your investment needs.
In this article
Markets in India in 2020
Before I talk about crashing markets, and whether it warrants you to sell your mutual funds, let’s look at what has actually transpired in the markets over the last 79 days. For the sake of explaining the impact of the virus on the markets, let’s look at Nifty 50:
Source : Yahoo Finance
While the year started on a good note and the index hit a new high on January 14, 2020, post-March, the decline has been huge (around 39%). While many investors are worried about this being the start of a longish bear phase, this is not the first time the markets are experiencing such volatility. Here is a quick look at the 5-year performance of Nifty 50:
As you can see, 2016 was a bad year for the markets too. While the most striking memory of that year is the demonetization scheme launched by the government, it was announced only in November 2016. However, markets had seen a huge decline in February 2016. Without getting into the reasons behind it, investors who had entered the markets in 2016, experienced phenomenal growth over the next 3 years. Let’s extend our view further by looking at the performance of the index since 2007:
If the 2016 drop seemed huge, it was still better for investors who had entered the markets during the 2008-2009 phase of the economic crisis.
Hence, as you can see, one thing that has been constant about the markets over the years is volatility. Regardless of the reasons, markets tend to go through ups and downs but over the long-term, they offer good returns.
The Market Crash of March 2020
Let’s take a quick magnified view of the Nifty 50 in March 2020:
As you can see above, March 2020 has been a period of major concern for investors. With the Nifty 50 hovering dangerously close to 8000 points from the peak of 12,362.30 on January 14, 2020, investors are unsure about selling or holding on to their investments.
What Should you do? Sell or Hold or Buy More?
The reason I shared a macro-perspective of the markets above was to help you understand the importance of long-term investments.
- While there is no way to predict in which direction the market will head in the future, you can analyze the past performance of the markets during a similar economic crisis and make an informed decision.
- A long-term strategy is usually preferred by investors since it helps them ride out such volatile times without worrying about their investments. Ergo, buying and selling mutual funds should be based on what your actual investing objectives are and how long are you in the market for.
If we were to assume the fear of the market regarding the economic impact of Covid-19 on Indian and global economy as the primary cause of the crash, we also have to consider the fact that eventually this pandemic will be brought under control and markets will recover.
Also Read: 5 most asked questions during a market crash
The question you should be asking yourself is how you can maximize your returns while keeping the risks in check.
SIP in Mutual Funds?
If you are invested in Mutual Funds via SIP, then this is the perfect phase to benefit from the Rupee Cost Averaging feature. With markets being low, you will get more units for the same SIP amount that will bring your average purchase price down considerably. Hence, once the markets recover, you will stand a better chance to earn handsome returns.
There is no simple answer to the question – Should I buy more mutual fund units or is it the best time to sell mutual funds.
The decision depends on the type of funds held by you, their portfolio composition, your investment goals, time horizon, and various other factors. However, what I CAN tell you is, don’t make any decision out of fear. Emotion-based decisions are usually counterproductive. Analyze your portfolio and talk to your investment advisor to create a strategy to sell, hold, or buy units that can help you diversify or hedge some positions and reduce the risk.
Lastly, many investors believe that since the markets are down, this is a good time to buy and wait until they recover. While this might seem like a great idea, consider the flip side to this decision before buying stocks or mutual funds.
- The securities you buy must have the strength to get through this phase unscathed and with enough firepower to bounce back.
- As the virus keeps spreading, the recovery time of the markets is increasing too. You need to have the holding power to generate profits.
- Timing the markets requires an in-depth understanding of the impact of various macro-economic situations on the market sentiment. An error in judgment can be costly.
While the current market crash is brutal and seems scary, we hope that the historical data helps you keep things in perspective. It is important to remember that not all long-term investors succeed. You need a portfolio that is chosen to generate good returns over 7-10 years. Hence, ensure that you don’t rush into any decision and analyze well before making a move.
Disclaimer: The views expressed in this post are that of the author and not those of Groww.