Entire world is in a frenzy over the spread of Covid-19. I was following the global spread of the virus and its economic impact since early January 2020. While the markets initially showed a lot of restraint, as the virus spread across countries, fear and panic took control and markets started crashing. I was hopeful of a cure soon and kept telling global investors to keep calm and ride out the storm. However, before I knew it, the virus was on our shores.
Health implications aside, the Covid-19 has hurt economies around the globe. Since January 30, 2020, when the virus reached India, the number of confirmed cases has been on a steady rise and the markets have been in a nosedive. While it seems scary, this is not the first time the markets have responded to a crisis in this manner.
In this article
A Historical View of the Markets
Let’s turn back the pages of history and look at the performance of the markets over the past 25 years. Here is a glimpse into the performance of Sensex:
As you can see, the markets have seen quite a few slumps since 1994. However, over time, despite the Asian Currency Crisis (1997), the 9/11 disaster (2001), the Global Financial Crisis (2008), the US Sovereign Rating Downgrade (2011), China’s Economic Slowdown (2015), and the Covid-19 (2020), the Sensex has multiplied nearly 10 times!
Let’s look at SIP returns of UTI Nifty Index Fund* during the past volatile times (2000, 2008, and 2014) and how they performed over the years:
*We chose UTI Nifty Index Fund as it tracks Nifty. This reflects the performance of Nifty subject to tracking error. CAGR is used to calculate compounded returns over a period of time.
Hence, if history is to be considered, then regardless of the market cycles, equity might seem volatile in the short-term but has the potential to generate wealth over the long-term.
Systematic Investment Plans During Volatile Times
So, how does one invest when the markets seem to be hitting new lows every other day? We would recommend a systematic investment plan (SIP) as the best way forward. When you opt for a SIP, you invest a fixed amount in a mutual fund at regular intervals regardless of the market cycle.
This means that for the same amount, you get more units when the markets are down and less when the markets are high. Hence, if you plan your investments now, you will be able to accumulate more units in the long-term. This will allow you to benefit from Rupee Cost Averaging.
For those who are unfamiliar with the topic, here is a quick explanation of Rupee Cost Averaging (RCA):
What is Rupee Cost Averaging?
Allow me to explain this with the help of an example:
Let’s say that you opt for a SIP of Rs.5000 per month for a year in an index mutual fund. By the end of the year, you make the following investments:
|Month||NAV||Number of units|
By the end of the year, you invest Rs.60,000 and receive a total of 1376.05 units. In December, when your SIP ends, the NAV is Rs.48. Hence, the value of your investment is Rs.66,050.23; a profit of Rs.6025.23.
On the other hand, if you would have invested in lumpsum in January, the number of units received would have been 1034.48 (341.56 units less). Also, by the end of December, the value of your investment would be Rs.49,655.17; a loss of Rs.10,344.83.
Hence, as you can see, in a volatile market, investing via SIPs allows you to average out your purchase price and offer you a better opportunity to earn profits.
Quick tips for Investing During Volatile Times
- Patience bears fruit: If you have a running SIP, then continue it. Give disciplined investing a chance to work for you.
- Avoid panic selling: Any investment decision made out of emotions is usually counterproductive. During volatile times, panic can make the decision of selling seem logical. However, remember that historically, markets have always bounced back.
- Focus on a long-term investment horizon: As soon as the crisis is averted, the markets with start focusing on the fundamentals again. If you have invested in assets with strong fundamentals, then you will stand a chance to earn huge returns.
- Diversify: Volatile markets also highlight the need for diversification. It helps reduce risks.
Remember, it might seem like a dangerous time to invest but disciplined and long-term investing strategies don’t take the short-term volatility into consideration. A systematic investment plan is definitely a great tool during such times. Use it to your benefit. I would like to close with a quote by Sir John Templeton: “The time of maximum pessimism is the best time to buy, and the time of maximum optimism is the best time to sell.” Stay invested!
Disclaimer: The views expressed here are of the author and do not reflect those of Groww.
Investment in securities market are subject to market risks, read all the related documents carefully before investing. Please read the Risk Disclosure documents carefully before investing in Equity Shares, Derivatives, Mutual fund, and/or other instruments traded on the Stock Exchanges. As investments are subject to market risks and price fluctuation risk, there is no assurance or guarantee that the investment objectives shall be achieved. NBT do not guarantee any assured returns on any investments. Past performance of securities/instruments is not indicative of their future performance.