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The Sensex has lost 30% of its value over the last 18 business days, twice as fast as it did during the 2008 crash. This has resulted in several questions “should we exit from equity mutual funds now to prevent further loss?” or “I need money after five years, should I wait for the market to recover?”, “It this a good time to start my SIP or should I wait until the market recovers?” Let us try and answer these.
Investors like to be offered hope: Don’t worry, this too shall pass (that it will, but what would be our state then?), this is a great opportunity and associated epithets. While these are good to read and get some social media likes/shares it will not help investor take the right action.
A logical well-thought-out plan is a necessary but not sufficient condition to staying calm during market turbulence. First, let us try to answer some FAQ.
Should we exit from equity mutual funds now to prevent further loss? That depends on when you need the money. Many sales channels push equity mutual funds for 2-3 years. If that is the case, time to exit now and prevent further loss.
- If you need money in the next five years (say 2025), exit now and prevent further loss.
- How about seven years (2027)? Leave no more than 25-30% in equity and push to safe debt and decrease equity gradually & continuously!
- How about ten years? Reduce equity exposure to about 40% and then decrease that going forward.
- Beyond that, you can hold on to (at least for some time) 50-60% equity.
In all of the above situations, it is crucial to decrease equity exposure step-wise or continuously and factor this decrease in your investments so that no matter what the market situation your portfolio is close to the target corpus desired.
If I pull out now, and the market recovers, I will miss out on the gains? Right there, is the biggest drawback of the typical equity investor: an inability to accept losses and move on and wait and wait for recovery and gains. The time lost will destroy both returns and our ability to generate a reasonable corpus.
There should be V-shaped recovery right? After the fall looks like half a V is it not? Sorry, markets do not follow predictable patterns. Let us stop and think about this for a moment. Markets are falling because people are scared. It would take at least the next few months to reduce the spread of new infections. Even if we assume people will come back to the markets at the time, the economic implications of world-wide social distancing can resonate for a couple of years.
Please recall that the 2008 crash had a “quick recovery” but what happened after that is a few years of side-ways markets. A global recession can result in the same situation now. It may or may not know. The point is, it would be too expensive for those with 5,7 (maybe even 10) year goals to stick around in equity and find out. Therefore cutting losses and moving to safe debt would be prudence. There is no shame in that. In fact, you could/would be avoiding further loss and distress.
When will the markets rebound? No one knows. Waiting for this to happen is hope. We have to do better than just investing on hope: A Mutual Fund SIP is Hope, Not a Strategy!
Is this a good time to start my SIP or should I wait until the market recovers? Investing each month on the same day (aka SIP) need not wait for the market to recover or zoom up. Investing each month and managing risk are two independent actions. Read more: Managing Risk Without Stopping Mutual Fund SIPs
My goal is long-term but I am worried about the daily market fall, should I exit from all equity investment and re-enter at a better time? Again the dreaded, “it depends”! If you have a plan on when to re-enter, you can pull out now. The problem is an exit in fear is typically done without a plan and this would not only affect when you enter back and also affect your future corpus and returns.
It may not seem much of a plan but if the money invested in the market is not necessary for your life in the next 10 years (barring any exceptional situation) then the easiest and laziest option would be to stay put. This would at least avoid the regret of not re-entering at the “right time”.
Of course, a good amount of assets in liquid fixed income is necessary before you decide that. If your job or business could be affected and you do not have enough liquid fixed income (that can used at any time) then it is better to pull out some equity and have the cash equivalent of 2-3 years expenses depending on your circumstances.
Shall I invest more in this market? You can, but again make sure you have the above-cash equivalent with you at all times.
My asset allocation is way off now from what I wanted, should I rebalance now? You can, provided you have the above-cash equivalent with you at all times.
How much did your portfolio go down in the current times? I am sharing updates in Facebook group Asan Ideas for Wealth. Shall write a detailed article.
How are you handling the current crisis? If we plan right and well in advance, there is not much to do when the market falls or rises. As mentioned in my yearly audit, an amount equal to the current cost of a UG education is already in fixed income and my son is only 10. My retirement corpus is just a bit less than 30X (X = annual expenses) and could go down further. I have some cash ready to offset this fall and hope to invest in the coming days.
If you any more questions or wish to share your strategy, please leave a comment.
About the Author
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. since Aug 2006. Connect with him via Twitter or Linkedin
Pattabiraman has co-authored two print-books, You can be rich too with goal-based investing (CNBC TV18) and Gamechanger and seven other free e-books on various topics of money management. He is a patron and co-founder of “Fee-only India” an organisation to promote unbiased, commission-free investment advice.He conducts free money management sessions for corporates and associations on the basis of money management. Previous engagements include World Bank, RBI, BHEL, Asian Paints, Cognizant, Madras Atomic Power Station, Honeywell, Tamil Nadu Investors Association. For speaking engagements write to pattu [at] freefincal [dot] com
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Sir, even debt funds are falling from last week. As you said your son’s UG amount is in safe debt and now even that is falling. Your thoughts?
Should one select post office schemes as they offer better interest rates or safe debt fund are still ok?
I have an investible cash and my
goals are 12-15 years away. My current equity is also only 30% so My plan is to invest via Nifty and Nifty Next 50 Index funds. I am a strong believer in idea of focus on corpus amount and not chase returns. I am satisfied with even 10% returns. However worried about diversification and risk. Any research on highest tracking errors of Index funds ? What are the possibilities that an index fund would miss the index returns by huge miles because of things like not able to sale shares ( lock in of Yes bank share) etc. cases. ? What are the other risks associated with Index investing?
I would rather own stock in my great company’s than any other investment-so I’ll keep my stock thank you.
Patty sir ,
I want to understand is it wise to prune my cluttered portfolio in this market conditions when my portfolio is approx negative 19 percent .
Due to poor advise from the relationship mgr most of fund is in midcap 60% approx rest in elss and multicap . Hence after going through your various articles , vedio’s and going through your goal base course understood the mistake and realised and had just started and thought of pruning the portfolio to max 3 no’s Which is presently 9 in no’s.
Further is advisable to shift inter category or in same category or to new asset allocation and category formulated for equity.
Amount invested is approx 10 Lacs and require the money in next 9 years when I will retire . All are in regular growth and free from exit load
however new formulation is only through direct fund .
Or last not the least leave it as it presently and redeem gradually as when a particular fund provide equal to fixed deposit .
My daughter s marriage is in near future, should I exit from SIP’S right now or should wait for 3 to 4 months .are there any chances to recover my losses if I continue my SIP?
Read the article and take an informed decision. Thanks.
My personal take:
– I am invested in the market since 2015. I am not exiting anything and if given an oppurtunity i would invest more in selected stocks and LC-Index fund which is for a goal close to 20 years. Currently I am at -13% on stocks and around -18%- This is only for my equity portfolio
– I would stay away from mid-cap till i see things stabilizing.(Though they may be the ones which would come up fast).
-My debt portfolio consists of EPF/PPF/VPF and some cash spread here and there.
When i have long term goal and no need of money now why would I stop SIP in equity exposure ? its not that same crises will go on for next 10 -20years and whole concept of SIP is pass through different market condition and gain a mean average over your Net NAV .
When markets are low for next 2 year also i will be gaining more units and when market eventually rise i break my break even point sooner than stopping equity exposure now then restarting my SIP in equity exposure when markets makes a bounces .
For young investor and investor for long term goal which 3-4+ years with a risk appetite above moderate i think its good to maintain equity and debt exposure and re balance it qty .
For investor who are closure to retirement and have immediate goal within 2 years should follow your suggestion which is best way to exit with right exit strategy