A bearish market does create a lot of panic among investors. But what does this situation mean and imply? Well, a panicking market is one where the prices of securities and commodities continue to fall. It has a further snow-balling effect. There have been such situations seen before both in India and outside of it when the market has crashed ruthlessly. But the more important thing to remember in this is that it also pulled itself together.
There can be many reasons for a market to start a downward trend. A lot of macroeconomic factors can be affecting the stock market in ways unimaginable to a regular investor. Factors such as political environment, inflation, tax changes, interest rates and so on. The market situation we are observing today is also a result of many such triggers, wherein even the best performing mutual funds are in consolidation mode.
Is there an ideal investor behaviour when the market panics? It cannot always be black and white, but let us look at a few things you must absolutely keep in mind when the market shows you a red flag-
Deep breathe. If we react at every positive or negative turn of the stock market, that is probably all that we will do throughout the year. Remember, we are not contesting against the market. Data from AMFI earlier this year divulged that only 29% of equity assets stay invested for more than 2 years. This is the reason concepts like rupee-cost averaging and power of compounding are not reflecting in the returns. The former ensures that your returns get averaged out even when the market fluctuates for a bit, over a period of a few years.
Buy More, Don’t Sell
The most common reaction to when a market plummets is for the investors to panic and sell the securities that have dropped in NAV. However, it is the exact opposite of what is advised to be done. Let us understand this with an illustration.
We see that a holding of Rs 20,000 has reduced by 50% due to a market crash here. At this stage, if you decide to sell, you will be making a loss of Rs 10,000. In contrast, what if you took advantage of the low NAV and bought more securities? Later on, when the market corrects itself, let us see where the investment stands.
It is a clear leap and hands-down profit. What we see here is a classic case of patience. The key is to think smart and bank on the right funds, which are sure to bounce back on a correction.
Go lump sum
A low market is also a good time to consider a lumpsum investment to take the maximum benefit of rupee cost averaging. You will end up buying more units for the same amount, owing to lower NAV. Subsequently, when you decide to sell at a higher NAV, you shall reap profits.
Asses your risk tolerance
A balanced portfolio is something advisors very often speak about, which is a mix of high-risk and low-risk funds (among other things). But this is very subjective with every investor. A market crash can be a huge eye-opener for the investor wherein he can assess just how much of a fluctuation is he okay within his financial planning. Depending on the same, a rejig of the portfolio can be done wisely. Your investments are made to make you feel secure, there is no point of them if they make you panicky.
A fluctuation market is a perfect time to get in touch with the financial consultant at WealthApp. They can use their expertise in providing you with a customized solution, keeping the above in mind. Consider us when you consider investment!