It
has been a month since the Lok Sabha results have come and the new NDA
government is in action; the stock market has been touching new highs every
day. Sensex has crossed 25,000 mark, and has risen by approximately 30% in the
last one year. Everyone is optimistic about the stock market and economic
development of India and expecting a lot from the new NDA government.
Most
of the investors must be finding their direct equity, equity mutual fund
portfolio in green and must be feeling happy looking at the supernormal
returns. In current market scenario their portfolio would be skewed towards
equity. Many of my investor friends have started calling me seeing supernormal
returns of more than 20% returns on their mutual fund portfolio due to the
current stock market rally. They share their views with me saying that they are
very happy with the returns. Some friends ask whether they should withdraw some
money or at least book profits, while some of them want to invest more. Exactly
the opposite happens in the worst-case scenario; when the stock market is
falling and the portfolio returns turn negative, investors start blaming their
investment advisers and financial planners and think this is the result of the
poor advice. They start comparing returns with fixed return instruments like
Fixed Deposits, PPF, etc. This is human psychology, where investors cannot
accept negative returns and losses on their investments.
Here
I would like to share with you that you should pay heed to your financial planner when he tells you about
the risks associated with the recommended investments. Not only this, you
should always be skeptical if you are investing in Equity or equity linked
investment instruments. You are not going to see your portfolio in green with
double digit returns everyday or every time. There are going to be periods
where you will get to see negative returns as well, where your total portfolio
value will be less than what amount you invested.
When
you are investing in equity-oriented investments like Equity Diversified Mutual
Funds, you should always keep in mind that you are investing for long-term
(i.e. at least 8 to 10 years). You cannot think of “Return OF Capital”
anytime during your investment time horizon of less than 8 years, but over a
period of 8 to 10 years, which is the minimum holding period you should have
for investing in equity; you can think of a reasonably good “Return ON
Capital” compared to other investment instruments. So, whether your returns
are positive or negative should not bother you between your investment tenure.
The prices are bound to be volatile and returns will fluctuate.
Equity
market does not move in a single direction (i.e. always upwards or downwards),
it is always volatile. I would say, the Newton’s law of gravitational force
applies to stock market, “what goes up, must come down”. So, if today
stock markets are moving up, it will (or may) go down, though we don’t know how
much and when it will go down.
You
must be feeling “Acche din aa gaye hai”; but for equity
investments it is always temporary. You should neither get excited when your
portfolio value is green nor should you panic when your portfolio value is red.
Systematic Investment Plan (SIP) is one of the ideal and the best ways of
investing in equity mutual funds. If you are investing via SIP, you should be
least concerned in what direction is the market moving since you are investing
month over month. Whether the market is rising or falling; you should not
withdraw all your funds, should not invest more and should not increase or
decrease the SIP amount with changing market scenario. You must review your
portfolio periodically (preferably quarterly) and check whether the fund has
beaten their respective benchmark or not; and also rebalance your portfolio and
have an appropriate asset allocation as per your risk profile and time horizon.
