A reader writes, “Sir, you have mentioned several times that equity mutual fund investing comes with no guarantees. I find this quite unsettling. Each time the market falls, I feel worried and am in two minds about investing. My mind tells me to stay invested, but my heart is worried. Please advise.”
It is true that equity investing (via mutual funds or via direct equity) comes with no guarantees but there is more than a reasonable chance of achieving our objective – beating inflation.
However, the returns we get are not in our control. If we expect 15% and end up with 10%, it will still be a failure to beat inflation because we may not have invested enough.
So the solution is to focus on the corpus required for specific goals and gradually inch towards that.
We can do this by taking the following precautions that will also help us stay investing. These are directed at beginners.
Equity returns come in fits and starts. That is, suddenly, you would get a huge return (e.g. March 2020 to March 2021), and sometimes, you would get nothing for months and months (e.g. Oct 2021 to June 2022). We never know in real time what the future trend is going to be. So the only way to handle this monster is:
1. Only invest money in equity you don’t need for at least the next ten years! This applies before retirement and after retirement.
2. Asset allocation is the key. Equity is like fire. It is essential for survival (to beat inflation in this context), but too much of it can be harmful. Always have a good chunk of fixed income instruments. Those who get anxious about equity mutual fund volatility should only not hold more than 40%-50% equity.
3. Invest systematically and continuously through rain and shine. We never know when it will pour. We will not make money if we do not have enough mutual funds or stock units accumulated before a market upsurge. The simplest way to do this is to invest systematically. This is, create a goal-based plan (the system) and then invest regularly regardless of market conditions.
This system should help us achieve our goals regardless of market conditions. For example, incorporate a gradual equity risk-reduction plan. Why? If there is a poor sequence of returns and “long term” returns are “poor”, we must still be able to achieve our goals.
4. Increase investments as much as possible. Why? This will help us maximise our corpus. This will give us the confidence that even if we lose a part of the corpus to market volatility (the system in step 3 would reduce the impact), we still would have enough for our goals.
Once we have a proper plan in place, our fear would reduce. Only those who do not have a plan and invest with only hope should fear. Those with a plan tailormade to fit personal requirements should only fear lack of action! Such investors have just one challenge before them: invest systematically and manage risk systematically in a goal-based manner.
