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    We don’t know the bottom, but bottom line is 'mutual funds sahi hai'


    Gone are the days when individual investors used to press the panic button on seeing their portfolio turning red. Now, most of them believe that crashes like this offer a great investment opportunity where many quality stocks are available at a cheaper valuation.

    ET Online
    By Rishabh Parakh

    Equity market is going through an unprecedented correction. S&P BSE Sensex has fallen to almost 25,000, from its peak of 42,000 it scaled in January, 2020. Gone are the days when individual investors used to press the panic button on seeing their portfolio turning red. Now, most of them believe that crashes like this offer a great investment opportunity where many quality stocks are available at a cheaper valuation. Many of them, it seems, have taken the advice of great investor guru Warren Buffet very seriously - be greedy when others are fearful and be fearful when others are greedy.

    No wonder, every investor is busy asking “is it the bottom of the stock market?” I have observed the trend with our clients and from the questions on my online webinars/seminars or even while responding to readers’ queries… almost everyone wants to know about the bottom of the stock market.

    Things You should consider
    • Annualized Return
      for : %
    • Suggested Investment
    • Time taken to double
      money: N.A
    Things You should consider
    • Annualized Return
      for 3 year: 2.22%
    • Suggested Investment
      Horizon: >3 years
    • Time taken to double
      money: 9.6 Years
    What is wrong?
    Absolutely nothing. But once you understand the reason why you are asking this question, you may probably stop asking it. The main reason behind the question is the unprecedented fear and the herd mentality. I have highlighted this in my book “Financial Spirituality” that in spite of knowing the fact that they are investing for the long term and they need to buy at dips, they kind of get stuck with finding the bottom, which makes them caught in the trap of timing the market. So, the million-dollar question is can you really find the bottom, and can you always buy low and sell at high?

    No point finding the bottom
    Someone famously said the only two people who know how to buy at low and sell at high, and these two people are the almighty God and a liar and the challenge is the fact that you don’t know how to speak to God and how to trust a liar. The stock market across the globe has already corrected big, and the battle with the Coronavirus is still on and the real bottom, specially with respect to the Indian stock market will be decided on some positive news of a cure and how far the virus will spread in India and the way we are going to handle it! So, whether it is a case of catching a falling knife or whether the knife has already fallen, only time will tell.

    Lose the golden opportunity to buy?
    No, you don’t need to lose this opportunity. Any sharp correction makes the strongest of the companies become cheaper and attractive. What I am advising you is to avoid the trap of finding the bottom. There is no guarantee that every cheap and attractive stock or a scheme will deliver. Those stocks can remain cheap and not so attractive. What will happen to your portfolio, if things get worse? That is why I am insisting on avoiding the trap of finding the bottom. Because, that generally derails your entire plan and action you may take. The best you can do is to buy in a staggered manner, buy at every dip. Spread your investments over the next few weeks to months and make peace with the fact that it would be okay to buy 10% or 20% higher than the bottom price.

    How can you avoid the trap?
    Ask a simple question: why did you invest in the market in the first place and why do you want to increase your investments now? If your answer is that you are investing to achieve your long-term financial goals, then you do not need to bother about timing the market and finding the bottom at all. Since your investment horizon is for a period of more than five to ten years and you do not need this money in the short term, it makes perfect sense to invest now. However, only in a staggered manner and not at one go.

    If you are a risk-averse investor and not comfortable with taking high risk, you should avoid buying stocks at this point of time. Timing the market will become futile and critical for your risk profile. For example, many investors bought stocks because they thought the market had hit the bottom when in 2008 the market fell from its peak of 21,000 to 15,000. Then the market further went down to 12,000. Investors bought more. The market fell to 10,000 and some lucky investors who still had the money to buy, bought again. Then the market hit 8,500. My point is: there is no end to this averaging. Hence, for a medium or risk averse investor, investing via mutual funds is the best possible way to participate in equity where the expert fund managers will look after your money, so do not invest in stock directly unless you have a good amount of time, money and expertise, else invest in mutual funds!

    Finally, we don’t know the bottom, but the bottom line is mutual funds sahi hai!

    If you have spare money which can be invested for five years or more, go and buy some good schemes. You can follow these simple rules to invest in mutual funds to create a sound portfolio:

    Buy some large cap funds or even the index funds will work best (I have already suggested investing in the index funds in my earlier column at ET Mutual Funds) and if your risk appetite is very high, you can look out for some good mid and small cap funds, too.

    Also Read: Is it time to switch to index mutual funds?

    Maintain a strict asset allocation discipline and re-balance your equity allocation. For example, if your allocation was 70:30 in Equity and Debt funds, then after the recent sharp correction it might have changed to say 50:50, then you need to rebalance it back to 70:30, based on your risk profile.

    For your lump sum investments, I would recommend investing 30-40% lump sum now and the rest should be staggered over the next few weeks. You should continue with your SIPs, or if you can, top up your SIPs and in no way, think of stopping them, sips are the best way to beat market volatility. Use the STP route for your lump sum investments which is one of the most effective ways of dealing with the volatility.

    (Rishabh Parakh is a Chartered Accountant and founder & Chief Gardener of Money Plant Consultancy. He is also author of "Financial Spirituality")

    (Disclaimer: The opinions expressed in this column are that of the writer. The facts and opinions expressed here do not reflect the views of
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    24 Comments on this Story

    km10122015334 days ago
    just want to say that all my more than 5 year old SIPs have come back to invested amount or less.
    iske bad kya me bolu- MF sahi hay?
    Sreeprasad Shetty335 days ago
    Mutual fund managers are the biggest looters of innocent much money these rich mutual fund managers do in comission...while poor investors have to loose their hard earned money
    Er.sanjeev Koul335 days ago
    Looters and financial criminals
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