The pandemic has thrown the world out of balance. Economies are struggling and markets are crashing around the globe. Many investors are at the edge of their seats contemplating their next move. Should they redeem? Or, stay invested? Maybe, this is a good time to invest more? These are times that have no precedents.
Most of us have never heard of anything like this and the uncertainty is causing panic and fear. I know that there are hundreds of questions in your mind and while I might not be able to answer all of them, I will be talking about one question that many people have asked me – Should I redeem my funds since markets are in a bad shape?
Before I answer, I would like to ask all of you one question – what is the best way to make an investment decision? Follow the market or stand back, analyze, and make decisions based on facts? Well, I prefer the latter. So, let’s look at some facts, to begin with.
So, what does this mean?
One thing is evident, equities have taken a huge beating. Even if you have a 50-50 debt-equity portfolio, the returns from debt are not balancing the potential losses from equity.
This means that if you redeem right now, you will book losses to the tune of 15-20% minimum.
On the other hand, you can choose to stay invested OR invest further to diversify your portfolio and reduce the overall risks. The latter approach could help you reach a place where recovery would be possible and losses could be far less.
Since there are two ways of investing in mutual funds – lumpsum and SIP, I will tackle them separately.
Since the performance of a lumpsum investment depends on the market conditions on the date of purchase, giving a specific reply will be difficult. However, since you have made a lumpsum investment, you would have expected the markets to rally soon.
However, when the sudden onset of Covid-19 threw all analysis off, you might be forced to reconsider your investments. There are two things that you need to consider:
Apart from the two points mentioned above, you must reconsider redeeming your SIP investments for another reason:
Rupee Cost Averaging
A systematic investment plan (SIP) is designed to help the investor benefit from market volatility. Since you invest a fixed amount in a mutual fund at regular intervals, you get more units when the markets are down and less when they are up.
Over time, the costs average out and your purchase price per unit falls. This puts you in a better position to earn returns.
Assuming that you have been investing in a mutual fund via SIP for the last one year. While the markets were volatile, over the last month, the drop has been steep. Therefore, if you continue your SIP investments, then you will be able to buy a high number of units for the same price.
Over time, as you continue your SIP investment and markets recover, you will have a lot of units on hand making it easier to recover your investment and possibly earn profits.
When the markets are down like they are now, redeeming your mutual funds seems like a counterproductive move. While it can be an option if you need funds urgently, as an investment strategy it seems more damaging than limiting the damage.
Instead of redeeming, you can start with analyzing your portfolio and creating a list of investments that you want to weed out when the markets recover a bit and those that you want to hold on to for the long-term.
These are unprecedented times and they demand unprecedented strategies. Talk to your investment advisor and create a strategy that helps you emerge a winner despite the market conditions.
A situation like a pandemic can cause emotions to run high. While crashing markets can instill fear in the minds of the most experienced investors, the pandemic adds to the uncertainty making it difficult to keep emotions at bay.
However, making emotion-based decisions will put you in a vicious cycle of panic-uncertainty-wrong investment decisions-losses-more panic-more uncertainty-worse decisions… Hence, get a grip over your portfolio, formulate a strategy to ride out this storm, and redeem if that seems like the best thing to do after careful analysis.
Disclaimer: The views expressed here are of the author and do not reflect those of Groww.