Rishabh Parakh is a Chartered Accountant by Profession and a founder and Chief Gardener of Money Plant Consultancy, an established firm based out of Maharashtra with operations expanded to Singapore & the UK. He is also an author of the Book titled "Financial Spirituality".
We have seen a massive correction in the stock market over the past few days amidst coronavirus panic, and investors are now wondering what’s coming next, and what should they be doing to tackle this situation.
The conventional advice
Around this time, you will come across two different kinds of advice. One set of people will tell you to buy right now, because you will be able to buy cheap and at attractive valuations. Another set of people will tell you to exit the market as soon as possible and save whatever money you can, before you lose more of it in this falling and unpredictable market. But it isn’t so black and white.
If you think about it, both steps are about buying time at the market. This is indeed a challenging period for investors. Not only is the market down, but other sectors like real estate haven't given returns in the past few years; thanks to the PMC and Yes Bank crises, people fear banks too. Gold has gone out of reach, because when everything falls, investors resort to gold.
Pause and think
Rather than press the panic button, the time is to step back and introspect. Go back to basics and look at your existing asset allocation. Ask yourself the following questions:
1) Have your financial goals changed recently?
2) Have you invested for short-term gains?
3) Do you have a financial emergency?
4) Is your equity investment more than 50 percent of your overall asset allocation?
If your answer to these questions is 'no', you can think further about whether the low or negative returns is there only on your invested stocks or mutual funds schemes? If not, then there is really not much for you to worry about. This situation is being mirrored across the world. You also need to know that this is something that has happened before. The issue is there are many who have not seen a bear phase before and their anxiety and worry is very natural. I keep advising people about this by always telling them that everybody need to go through a bear phase once because the way there is a light at the end of the tunnel, there will be great returns to be made once the bear phase is over and the bulls take over. And the conviction what the investor gets after going through that phase enables them to handle any market condition, the challenge generally comes to a new investor facing this for the very first time.
Tips to handle this situation
1) If you have extra cash available, you can consider investing in the market at this point in a phased manner; buy at every dip but be mindful about sticking to your asset allocation mix.
2) Similarly, you can also shift some of the money you have lying in liquid funds to equity funds.
3) If you don’t have spare money in liquid funds, then consider the money you have invested in FDs, or in avenues you can easily withdraw from. You could use it to take advantage of this opportunity in the market, provided you have done your math. If a larger chunk is invested in the fixed products like FDs, PF, PPF or NSC, you can definitely look at equity investment right now to reset your asset allocation to optimise the current market situation to your advantage.
4) If you have a good asset allocation and have invested heavily in the market over the last three to four years, and don’t want to increase your exposure in this situation, then keep your investments as they are, and forget about them for the next few months. Just because the market is going down, you don’t always have to do something. Not doing something is also a decision you make, and sitting on cash is also a position. And as far the notional losses are concerned, the market is likely to rebound once a cure to the coronavirus is developed.
5) Don’t think of stopping your SIPs or withdrawing your investments. In fact, SIP is the best way to gradually invest in the volatile market, systematically. If you have time, money and expertise, you can also buy stocks available at a lower price, because remember, the stock price correction is not a correction in the fundamentals of those businesses.
The important thing to remember is that it has happened in the past, it is happening right now and it will happen in future also. Always remember that it is never about how the markets are behaving but it is about how you behave. 'Karo na' investments, subject to your asset allocation and risk profile.
The writer is a Chartered Accountant and founder and chief gardener of Money Plant Consultancy