Last Updated on February 12, 2022
For the first time in the history of the Indian capital markets, we have so many first-time investors -many in this 20s and 30s -facing increased turbulence in the markets and fears of a global market crash. So it is natural to have questions like “How to protect our MF investments during a market crash?” and “should I wait until the markets have settled down?”. This is a discussion on how young earners should plan and prepare themselves for a market crash.
This article stems from an email received from a reader, Satya. Hello Sir, I have been watching your videos and reading your blog for a couple of months. I see that you are putting most of your savings in MF. I want to know how to protect your MF investments during a market crash? I’m 40 and I want to start investing but I worry too much about Market Crash and I’m sticking to FD’s. I would really appreciate it if you can suggest to me how to mitigate the risk during a market crash? Thanks, Satya.
So let us start with the basics. Loss from equity investments (stocks or mutual funds) do not arise just from market falls or crashes. In fact, the biggest enemy for an investor is a “sideways market” where the market moves up one day, down the next for weeks, months and years.
Since time is money (quite literally), the longer it takes for the market to move up, the lesser would be our returns. Along with market fall, this is known as a sequence of returns risk or colloquially “bad luck”.
I am sure you would agree that we cannot let luck decide our investments, our future goals, and our dreams. The mutual fund industry wants us to do precisely that. Regardless of whether our “long-term” investments do well or not, they would earn via the expense ratio. Hence the mantra, “do not stop your SIPs”! Higher the fear associated with market turbulence, louder the chanting.
Buying mutual fund units on the same day of each month (aka SIP) and assuming it will work out in the long-term is more dangerous than a market crash. I have earlier shown How the fate of your mutual fund SIPs is decided by “timing luck”. Here is another illustration.
At the time of writing, the Sensex is down 0.45%. If it closes in the green today, the fear of a market crash for most investors will probably evaporate. We need to do better than this. Let us consider an entirely imaginary situation where the returns from March 2020 to Oct 2020 are identical to the returns between Jan 2008 to Nov 2008. Then this is how the Nifty (including dividends) would look like.
This is not a prediction but an imagination to understand and appreciate risk. Needless to say, it is a mighty fall. Imagine a SIP in Nifty 50 index fund started 10 years ago, in March 2020.
The month on month variation in the annualized return of the SIP obtained using the Mutual Fund SIP XIRR Tracker is shown below. Notice how sensitive SIP returns are to market fluctuations even 6,7 or 10 years after starting the SIP. This is the ground reality. As shown earlier, Mutual Fund SIPs Do Not Reduce Risk! Beware of Misinformation
After 4Y, the returns were about 17%, went all the way down to 6% about two years later. The lastest return is as indicated above, 9.67%. I am astonished how some investors look at this and say, “hey 9.67% after 10 years, that is not so bad, is it?”.
The point about risk is entirely lost on them. Suppose this SIP was started five months before March 2010, in Oct 2009, then its current fate would be 8.51%. A person who started investing in equity in Oct 2009 surely would not have expected just 8.5% returns! It was tax-free then, taxable now. This fluctuating returns and the way the returns respond to market movement is referred to as “timing luck” or just luck is good enough!
Some people argue 8.5% is still good. Unfortunately, it is acceptable if I had expected a 9% pre-tax from equity and ended up with 8.5%. Most people expect 10%, 12% even 15% and invest proportionally.
The problem is, if you invest a double-digit return and get less, your corpus would fall short of its target because you invested less. This is a risk that eludes most people. So what is the solution?
How to protect our MF/equity investments?
- Investing with a clear goal in mind is the best way to lower risk as it allows you to focus on the targe corpus and not target returns. Yes initially a return expectation is necessary, but the above should convince you to keep it as low as possible.
- Once there is a goal, there is a deadline and this means the equity in your portfolio should be reduced many years before the deadline. Want proof? Check this out: How to reduce risk in an investment portfolio We discuss alternate risk-reduction strategies in the lectures on goal-based portfolio management no matter what the market conditions
- When the equity in the portfolio is to be varied as per a set plan (not depending on market conditions), the overall portfolio return would continuously change.
- So all that matters is how the investment corpus is expected to grow and what is its current position. Members of the goal-based portfolio management Facebook group (link above) discuss these ideas and some have also implemented this.
- Once there is a variable asset allocation plan in place, periodic rebalancing of the portfolio will reduce risk. The peace of mind that the investor is on the right track should make them sleep better.
It is the lack of a proper plan that makes investors fear the market and doubt their own decisions. It would make a big difference to an investment portfolio and peace of mind if such a plan with personalized inputs is set in place. This can be done with the Freefincal Robo Advisory Software Template.
🔥Enjoy massive discounts on our courses and robo-advisory tool! 🔥
Use our Robo-advisory Excel Tool for a start-to-finish financial plan! ⇐ More than 1000 investors and advisors use this!
- Follow us on Google News.
- Do you have a comment about the above article? Reach out to us on Twitter: @freefincal or @pattufreefincal
- Join our YouTube Community and explore more than 1000 videos!
- Have a question? Subscribe to our newsletter with this form.
- Hit 'reply' to any email from us! We do not offer personalized investment advice. We can write a detailed article without mentioning your name if you have a generic question.
Explore the site! Search among our 2000+ articles for information and insight!
About The Author
Dr M. Pattabiraman(PhD) is the founder, managing editor and primary author of freefincal. He is an associate professor at the Indian Institute of Technology, Madras. He has over nine years of experience publishing news analysis, research and financial product development. Connect with him via Twitter or Linkedin or YouTube. Pattabiraman has co-authored three print books: (1) You can be rich too with goal-based investing (CNBC TV18) for DIY investors. (2) Gamechanger for young earners. (3) Chinchu Gets a Superpower! for kids. He has also written seven other free e-books on various money management topics. He is a patron and co-founder of “Fee-only India,” an organisation for promoting unbiased, commission-free investment advice.Our flagship course! Learn to manage your portfolio like a pro to achieve your goals regardless of market conditions! ⇐ More than 3000 investors and advisors are part of our exclusive community! Get clarity on how to plan for your goals and achieve the necessary corpus no matter what the market condition is!! Watch the first lecture for free! One-time payment! No recurring fees! Life-long access to videos! Reduce fear, uncertainty and doubt while investing! Learn how to plan for your goals before and after retirement with confidence.
Our new course! Increase your income by getting people to pay for your skills! ⇐ More than 700 salaried employees, entrepreneurs and financial advisors are part of our exclusive community! Learn how to get people to pay for your skills! Whether you are a professional or small business owner who wants more clients via online visibility or a salaried person wanting a side income or passive income, we will show you how to achieve this by showcasing your skills and building a community that trusts you and pays you! (watch 1st lecture for free). One-time payment! No recurring fees! Life-long access to videos!
Our new book for kids: “Chinchu gets a superpower!” is now available!
Must-read book even for adults! This is something that every parent should teach their kids right from their young age. The importance of money management and decision making based on their wants and needs. Very nicely written in simple terms. - Arun.Buy the book: Chinchu gets a superpower for your child!
How to profit from content writing: Our new ebook for those interested in getting side income via content writing. It is available at a 50% discount for Rs. 500 only!
Want to check if the market is overvalued or undervalued? Use our market valuation tool (it will work with any index!), or you buy the new Tactical Buy/Sell timing tool!
We publish monthly mutual fund screeners and momentum, low volatility stock screeners.
About freefincal & its content policy Freefincal is a News Media Organization dedicated to providing original analysis, reports, reviews and insights on mutual funds, stocks, investing, retirement and personal finance developments. We do so without conflict of interest and bias. Follow us on Google News. Freefincal serves more than three million readers a year (5 million page views) with articles based only on factual information and detailed analysis by its authors. All statements made will be verified from credible and knowledgeable sources before publication. Freefincal does not publish any paid articles, promotions, PR, satire or opinions without data. All opinions presented will only be inferences backed by verifiable, reproducible evidence/data. Contact information: letters {at} freefincal {dot} com (sponsored posts or paid collaborations will not be entertained)
Connect with us on social media
- Twitter @freefincal
- Subscribe to our Youtube Videos
- Posts feed via Feedburner.
Our publications
You Can Be Rich Too with Goal-Based Investing
Published by CNBC TV18, this book is meant to help you ask the right questions and seek the correct answers, and since it comes with nine online calculators, you can also create custom solutions for your lifestyle! Get it now.Gamechanger: Forget Startups, Join Corporate & Still Live the Rich Life You Want
This book is meant for young earners to get their basics right from day one! It will also help you travel to exotic places at a low cost! Get it or gift it to a young earner.Your Ultimate Guide to Travel
This is an in-depth dive analysis into vacation planning, finding cheap flights, budget accommodation, what to do when travelling, and how travelling slowly is better financially and psychologically with links to the web pages and hand-holding at every step. Get the pdf for Rs 300 (instant download)