Stock market tumbles by 6% on Monday and lead to
panic in the market. The fall was the biggest in stock market history. The
Rupee also closed at two year low against the dollar. Devaluation of Chinese
Yuan and slow down in Chinese Growth lead to current crash in the market. The
volatility and uncertainty is the part and parcel of the stock market and
nobody can ignore this. The reasons come and go, sometimes local, sometimes
global. We had gone through many bad
chapters in the last decade within India, may it be political uncertainty and
coalition Government era, Global Sanctions on us, Kargil War, Satyam Scam,
Terrorist attacks and down grade of Indian economy by rating agencies. Globally
we have seen US subprime, European debt crisis and now we are witnessing
Chinese slow down. We have also seen war like situations in many parts of the
world now it’s time for currency war. Uncertainty
comes and goes, if you know what risk you are taking then it may surprise you
in the long run with good returns. If you want to be in equity game and want to
make profit then you have to be long term investor.
This daily volatility should not affect long term
investor because large profits are made if investments are done when the markets
fall. Globally things are bad but locally our economy is improving. When last
time market fall in 2013 the reason was our economy was passing through the bad
phase this time the fall is due to external factors. India has moved ahead after new government
has taken over the charge. Inflation at present is under control and likely to
be below 6% for current financial year. RBI cuts repo rate by 0.25% thrice in
recent past. We have all time high forex reserves. There is increase in tax
revenues and also subsidies have gone down. Fiscal deficit is also coming down.
Large disinvestment plans will also help reducing fiscal deficit to below 4%. The
falling crude and commodity prices will also help Indian economy to revive
faster.
I think fundamentals with in the country are showing
improvements which give confidence to stay invested in Indian equity. Economy also runs in a cycle; like good phase
in the market bad phase is also not permanent. Risk comes from not knowing what
you are doing. Taking informed decision always help to take calculated risk. It
is rightly said It is not timing the market, but time spend in the market is
more important. It is very difficult to predict the future direction of the
stock market and you must stay out from predicting the market movements. If you
have planned your investment well then there is no reason to panic.
It is always advisable to invest through mutual fund
schemes compared to direct investing through stock markets preferably through
monthly SIP (Systematic Investment Plan). In mutual fund also prefer a
diversified equity fund over sectrol or thematic fund. SIP is always a better strategy
for investing in equity in the long run. SIP is the way of creating wealth for
future goals by investing fixed amount regularly month on month on a fixed
selected date in one of mutual fund scheme. The advantage is you get is rupee
cost averaging, which lowers the average cost. Secondly you are not worried
about daily volatility of the market and makes market timing irrelevant. It is
affordable and you can easily continue for long term and get the advantage of
power of compounding.
It is also
advisable to park the lump sum amount in liquid plus fund instead of investing
large amount in equity and give instruction to shift the fund in equity scheme by
systematic transfer plan in next 24 months time. During uncertainty and volatility
SIP/STP gives much better results and also reduces the risk. It is foolishness
to stop SIPs in bad phase of the market. The key lies in discipline and regular
monthly investment without looking at daily ups and down in the market with
clear cut long term horizon. It is also advisable to get a financial plan made
from professionals. The financial plan will tell you which of your investment
is long term and which is short term. Once you are confident that your
investment is for longer term, this volatility will not affect your decision to
continue SIPs in equity.
You should know equity as an asset class before
investing. Equity investment comes under high risk high return category. You should
not expect overnight profit from equity and it’s not a short term game. Equity
has always outperformed other asset class in the longer run and also beaten the
inflation by margin. The research and data clearly shows that stock market has
given average return of around 17% for any 10 year period starting from January
1995 till August 2005. So if you have invested in any of these 128 months between
above period and hold the investment for 10 years without looking what is
happening in the market, you would have made average return of around 17% p.a. Needless
to say the good fund managers have beaten this average return by 3-4% p.a.
means have given 20% p.a. return for a time horizon of 10 years.
Now choice is yours. Whether to play safe and be
satisfied with 8% average return or take a calculated risk and accumulate
double corpus for future needs.
This article first appeared at indianotes.com
http://www.indianotes.com/Finance-How-to/Equity-and-SIP--Made-for-each-other/197043/6/PF
