Stable long-term asset allocation is the key to minimizing risk and maximizing returns from investments. It is well documented that equity outperforms all other asset classes in the long run. But the excessive volatility in the short run unnerves investors, particularly the new entrants in the market. Knee jerk panic reactions to events have often been proved wrong.
Reacting to the crash of end March many investors quit/redeemed their investments. Since then, globally, markets have appreciated around 40 percent. Nifty is up by around 41 percent and Nifty mid-cap and Nifty small-cap are up by 36.8 and 42 percent respectively from their March lows. Think about the losses that people who quit must have incurred! Those who stayed invested and continued to invest systematically have participated in one of the sharpest bull runs in history.
Recent trends in mutual funds indicate some undesirable developments. June data from Amfi shows that flows into equity mutual funds have fallen to 4-year lows. Even SIPs have taken a hit. This may be due to various reasons. Some investors are facing financial pressure due to job losses or pay cuts.Many HNIs and institutional investors might have redeemed to book profits after the huge run up in May and June. Many investors,dissatisfied by the recent poor returns, may be redeeming their investments. Some are saving money as a precaution. Some investors are redeeming and focusing on trading/ speculating in the market, which is a shortsighted view.
An important lesson from market history is that tops and bottoms can be understood only in retrospect. Markets have an uncanny ability to surprise and it is impossible to time the market. The only way to create wealth is through long-term systematic investment.
Those who are financially stressed may consider reducing SIP for a short period. Another alternative is pausing SIPs. Most mutual funds allow the option of pausing SIPs for a few months and resuming again when normalcy returns.
Nifty earnings are likely to take a big hit in FY 21. So valuations based on forward earnings would appear very high. But, markets are forward looking and presently, it appears, they are focused on FY 22 earnings, which are likely to be impressive since growth and earnings are likely to rebound sharply from the low base of FY 21.
With Nifty above 11000, there are certain important factors, which retail investors have to keep in mind: The bullishness in the markets, globally, is due to liquidity, particularly the massive liquidity injected by the Fed. This rally doesn’t have earnings support. A sharp correction is possible any time. It would be safe to be in quality large-caps during this correction. Small and mid-caps in bubble territory would be badly mauled during the correction.
During turbulent times like these, investors should stay the course and persist with an asset allocation strategy in tune with their financial goals. Market history teaches us that time spent in the market is more important than trying to time the market.