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Photo: Mint

Opinion | Patience and self-control will be richly rewarded by the equity market

Emotional strength and having faith in the investing process will be crucial

These are unprecedented times and it is extremely important for us to take all necessary precautions. If we each do our part, we can overcome this pandemic and get back to our normal lives soon. That said, I have been receiving queries and concerns regarding the current state of equity markets. The inherent nature of equities is volatile. As they say, volatility is a feature of equity markets and not a bug. So, equity investors will need to periodically ride this roller-coaster of volatility. It would be even better if you can take advantage of this.

The market oscillates between the emotions of greed and fear. Today, we are seeing extreme fear prevalent in the markets and everything seems worse than it appears. In life, as in markets, nothing is as good or bad as it appears. I would like to think that it is no different this time. In my interactions, I have come across investors primarily in three kinds of situations.

The first set of investors are the ones who are already fully invested in the markets. Obviously, their portfolio has lost value quite rapidly in the last one-month. Three-year returns have turned negative and five-year returns have come down quite drastically. For these investors, now is not the time to panic and make rash decisions. Stick to your asset allocation and rebalance if possible to increase your equity exposure. Do not stop your systematic investment plans (SIPs). Do keep or continue to keep some emergency funds parked in safe options like liquid funds in case there is some unseen event or expenses that need to be met. Please do not use this to invest in the markets.

Remember, equity investment is for the long term, so don’t be too perturbed with short-term movements. This is easier said than done and such difficult times will test the patience of even seasoned investors. So being mentally and emotionally strong will be key in riding this wave of volatility. These investors will be richly rewarded for their perseverance in due time.

The second set of investors are the ones who have invested in the markets but need to redeem their investments due to various reasons. Business owners who foresee a slowdown in their business will require funds in the near term. I sympathize with these investors, who face job losses or other extenuating circumstances, as they will be forced to redeem their investments at the worst time possible. In these trying times, it is important to have peace of mind. I hope these investors are not disheartened by their experience and re-enter the markets for a better experience when things have settled.

The third set of investors are the ones who are waiting on the sidelines or have the cash to deploy. This is a sweet spot to be in. The market fall provides a good opportunity to enter. No one can predict the market peak and bottom, so the best thing is to invest in a staggered manner in a falling market. I believe such opportunities come maybe once a decade so if people can, they should really take advantage of this.

Lastly, for those investing in direct equities, it is important that you are invested in strong companies with good balance sheets. Just as the virus is more threatening to old and ill people, it is similarly a threat to fragile businesses. Extremely leveraged businesses in vulnerable sectors such as airlines, hospitality and travel could face severe stress and could be forced to close down. One must look to be invested in robust and strong companies with zero (or close to zero) debt and large cash reserves. These kinds of companies can, in fact, use this opportunity to make acquisitions and increase market share.

Direct equity investing is not an easy thing. A lot more people fail than succeed trying to invest on tips or from casual advice on different platforms. It needs a rigorous understanding of the businesses and requires a huge time commitment. If you are willing to put in the grind and are confident to do it yourself then by all means, go ahead. If not, one should look to take guidance and invest with professional money managers.

In conclusion, those investors who manage their behaviour well will be successful. Emotional strength to see off this tough period and having faith in the investing process will be crucial. Patience to ride out the volatility and also take advantage of it by investing more when you don’t feel like will be richly rewarded.

History shows that tough times never last, tough people do!

Neil Parikh is CEO, PPFAS Mutual Fund

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