Good Investments are made during challenging times

At midnight on 31^st December 2019, people around the globe celebrated boisterously, like always, to usher in the New Year 2020. As grim as it may sound, no one had the faintest idea of what awaited them in 2020. As we have witnessed in the first 3 months of 2020, this is a year like no other in recent memory and unfortunately, for all the wrong reasons. The Coronavirus pandemic has ravaged mercilessly through cities and villages of countries across the world and most nations are already paying a huge social and economic price for this pandemic.

Owing to uncertainty around extent of virus transmission, human cost, impact on GDP etc., the coronavirus pandemic has thrown financial markets into a turmoil as there is panic and pessimism all around. However, it is worth noting that this is not the first time that markets have witnessed such correction, nor will this be the last one. The following table highlights major corrections in Indian capital markets over the last 2 decades triggered by various factors and subsequent returns over the next 3 and 5 years. It can be observed that historically investments made during challenging times have yielded attractive returns in the long run (i.e. 3 year and 5 year periods).

Date of Investment	Event	Previous 1 Year NIFTY 50 Return% (Absolute)	Next 3 YearsNIFTY 50 Returns % (CAGR.)	Next 5 Years NIFTY 50 Return % (CAGR.)
30-Sep-2001	9/11 Attack	-28%	24%	31%
31-Dec-2008	Global Financial Crisis	-52%	16%	16%
31-Dec-2011	European Debt Crisis	-25%	21%	12%
31-Mar-2020	Coronavirus	-26%	?	?

                                  Source: ICRA  Online

 

Historical performance indications and financial market scenarios are not reliable indicators for current or future performance.

As seen in the table above, equities have rewarded investors in the long run after major corrections.

In fact, investors with a long time horizon can use this correction to their advantage by increasing exposure to equities by investing in Equity-oriented Mutual Funds. Investors should invest in equities in a staggered manner over the next 2-3 months as no soothsayer can tell where the bottom is in the current situation. Waiting on the side line for the bottom could result in missing out on the opportunity. Likewise, considering the fact that we do not know how long the pandemic will last, investing everything at once is not advisable too. While taking the SIP (Systematic Investment Plan) route in equity mutual funds is par for the course at all times, one should continue the SIPs and supplement such disciplined investment with staggered lumpsum investment over the next 2-3 months, as mentioned above, considering the extraordinary circumstances that we are witnessing at present.

The current volatility in the market acts as good reminder of the true nature of equities, which is often forgotten at times, amidst misplaced euphoria and exuberance. Equity, as an asset class, is bound to be volatile and unpredictable in the short run. In times like these, investors need to stick to certain thumb rules.

1) Invest only risk capital in equities i.e. do not invest in equities with money that you need in the short term. Put another way, use equity to meet long term financial goals and not short term/immediate ones.

2) Understand your risk appetite and select the right asset allocation.

3) Create a well-diversified portfolio by investing in equity mutual funds through SIPs and supplement such investments with staggered lumpsum investments during major corrections.

One needs to be mindful of the fact that a health crisis of this scale has not been witnessed in over a century since the Spanish Flu of 1918 and hence it is not strictly comparable to other financial events that we have witnessed over the last 2 decades. At the same time, it is worth pondering over how the situation could be a year down the line. It is difficult to think of a plausible scenario 1 year from now, where major economies are still under lockdowns, co-ordinated global effort has borne no fruit or for that matter, all fiscal and monetary efforts have only turned futile. Human minds tend to oscillate between extreme emotions and at present, the proclivity is to believe that everything is doomed. One needs to go beyond such a line of thought and view things objectively. It’s worth noting that there have been hardly any instances like the one we are witnessing now, where nations across the world have coordinated at this scale in pursuit of a common goal.

As it is often said “Never let a serious crisis go to waste”, investors should use the current turmoil in financial markets to build a solid long term portfolio. If at all anything, this opportunity to increase equity exposure after a major correction can be one of the rare silver linings today in a world filled with pessimism.

The above article should not be construed as a directional view on equity markets and is not an investment advice. Investors should obtain their own independent advice before taking a decision to invest in any securities

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