When pandemics throw the world out of balance, economies struggle and markets crash. This makes it difficult for investors to decide whether or not to invest more money into their stock holdings during this time.
Most people have not heard of it, and the uncertainty is causing panic and fear. I know that there are hundreds of questions in your mind, and while I cannot answer all of them, I will be talking about how to handle one common question - Should redeem my funds since markets are deteriorating?
Before we answer, I want to ask all of you one question – what is the best way to make an investment decision? Follow the market or act in a more calculated manner? Well, I prefer action over inaction. So, let’s look at some facts, to begin with.
So, what does this mean for you?
It is clear that equities have taken a big hit, with the potential to cause losses even in a 50-50 portfolio of debt and equity.
The value of a voucher decreases the longer you wait to use it, and you will likely lose 15-20% if redeeming right away.
On the other hand, you can choose to stay invested and develop your portfolio.
You could invest further to diversify your portfolio and reduce the overall risks. Doing so would help you reach a point where recovery becomes possible and losses are reduced.
There are two main ways of investing in mutual funds: lumpsum and SIP.
It's difficult to say what you will get for your lumpsum investment, since the market conditions at the time of purchase determine returns. If you were expecting markets to rally soon, then it might not be as beneficial as you thought.You need to weigh two options when the sudden onset of Covid-19 throws off all analysis and causes you to reconsider your investments.
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.
If you continue your SIP investments, then you will be able to buy a high number of units for the same price; however, if you withdraw from it now, then there is a good chance that these withdrawals will have little impact on the drop.
SIPs allow you to build a portfolio gradually over time, and as the market recovers it becomes easier for you to sell units.
Redeeming your mutual funds may seem like a pointless move now that the markets have fallen. Although you can do it if urgently needed, doing so as routine investment tends to be more harmful than beneficial in the long run.
It would be wise to keep the list of investments that you want to hold on for the long run and those that you plan on selling when markets recover, rather than redeeming what's in your portfolio now.
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 for even the most experienced investors. The pandemic is another factor that makes it difficult to keep emotions at bay during crashing markets.
However, panic over the current situation will lead to confusion and bad decisions. Instead, devise a strategy to combat it until conditions improve then redeem when it seems like your best option after careful analysis.
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