Every investor in India has experienced that uneasy feeling when the market falls and portfolio values turn red. Headlines scream about crashes, relatives share worrying forwards, and the temptation to stop investing grows. Yet regular monthly investing was designed for exactly these moments. Testing different market scenarios on a SIP Calculator can help you see that temporary declines are not fatal to long-term goals. In the same way, an SWP Calculator can show how a retiree might adjust withdrawals during weak markets. Understanding how volatility works removes much of its power to frighten you.
Why Markets Move Up and Down
Markets tend to fluctuate on a daily basis due to a variety of factors such as corporate profits, interest rates, global news, oil prices, monsoon conditions and even the mood of the market. While short-term movements are unpredictable and cannot be forecasted, over a long period of time, equity markets have shown a tendency to rise in line with economic growth and profits.
India has witnessed several corrections over its decades-long journey, and each time the market has recovered to register new highs. While it is impossible to predict the future, history does give us an insight into the possible scenario.
How Rupee-Cost Averaging Helps
When you invest a fixed amount every month in the stock market, you end up buying more units when markets are down and fewer units when markets are up. This phenomenon is called rupee-cost averaging.
A market fall, while being an unfortunate event, is not a bad time to be invested. In fact, a falling market helps you to average your purchase cost as explained above. The only way you can actually lose out on the gains of a falling market is by exiting at the bottom.
Controlling Your Own Behaviour
One of the best ways to control your investment risk is to control your own behaviour. It is human nature to get scared and run away at the worst possible time and grab on to stocks at the peak valuations. Controlling this behaviour is key to building wealth.
To do this, try to cut down on how often you monitor your portfolio. Do it maybe once every quarter. Think about your investment goals and time frame rather than trying to second-guess the markets. Have a separate emergency corpus that covers at least 6 months of expenses so that you do not have to liquidate your investments in case of an emergency. Do not fall prey to social media frenzy or opinion from so-called experts on TV.
Building a Portfolio That Lets You Sleep
Your asset allocation should be in a manner that you are able to withstand a severe correction without losing sleep. If you are unable to sleep over a 20 per cent fall in the markets, it is a clear indication that you have too much money exposed in the direct equity or equity mutual fund category.
Diversification is the best way to reduce risk. Do not park all your money in large-cap funds. Hybrid or debt funds can also help you reduce portfolio volatility. A balanced mix of large-cap, mid-cap and sector-specific funds can help reduce risk.
It is always a good idea to rebalance your portfolio once a year. If your equity exposure has gone well above the pre-decided limit, it is a good time to book some profits and shift the money to safer debt instruments.
Conversely, if your equity exposure has gone well below the pre-decided limit, you can utilise the opportunity to top up your investments. This way, you can take advantage of buying at discounted rates and selling at higher rates without having to time the market.
For Those Withdrawing Income
Withdrawing pensioners have a unique set of problems. Since they have the habit of selling their units to generate income, a down market is much more damaging for them as they end up selling a larger number of units. The best way to deal with this situation is to maintain a cash reserve that can cover at least 1-2 years of expenses. This way, during a down market, they can utilise the cash corpus rather than liquidating their investments.
Volatility is the price that we pay for participating in the equity markets. By adopting a systematic approach, controlling our behaviour and managing expectations, we can actually utilise volatility to our advantage.
