The outbreak of the coronavirus is an unparalleled event in all of human history, the repercussions of which are being borne by the entire world. Stock markets around the world have corrected in expectation of business disruption, and life is now at a standstill. With governments all over the globe have announced relief measures and massive spending lined up amidst the lockdown, the UN has declared COVID 19 to be the worst crisis ever since the Second World War.
Amid such situations, investors are bound to panic and start looking for alternate solutions. In the month ending March 2020, the Sensex fell by 23 percent and reached levels that were last seen in 2016. And though some recovery has been seen, there is still a long way to go. And Sensex is not alone in this. Even the S&P 500 which comprises some of the largest and most renowned multinationals crashed 12.5 percent in one month.
Amid these scenarios, it only makes sense to revisit the basics of investing. The principles of investing are timeless and do not change when the market does. And while the present scenario may be an unpredictable one, this is not the first time that the market has shown such wild swings.
Keep a long term outlook
Markets do over-react in difficult times. And the degree of panic can be measured by the speed of the fall. Looking at matters from this perspective, the current state of panic does seem extraordinary. The current crisis took just 26 days to send the Sensex crashing down, and it had taken much longer to register a similar drop even at the time of the 2008 financial crisis and the 1999 tech bubble.
The question here is whether or not the fall is over, or is there is more pain to follow. Unfortunately, this is anybody’s guess. One cannot extrapolate the trends of the future from the past when the underlying cause of events differs significantly.
There is one common thread here.
Markets have recovered every single time, and have then gone to generate more wealth for investors. Within five years, markets were well on their feet and surged ahead on almost every occasion. This holds when you measure recovery not just from the lows, but also from the highs before the crash. In the latter scenario, SIP investors were the clear winners, since they were able to average their investment cost during the fall.
Mutual funds don’t just give you instant diversification, but also help you to benefit from the professional management of your money. In market downturns like what is going on at the moment, investing in mutual funds becomes all the more important.
Mutual funds can contain their downside better than their benchmark indices. Also, a majority of these funds in most categories have beaten their respective benchmarks, especially when it comes to the mid and small-cap segments.
Domestic mutual funds are beneficial not just for the investor, but also for the overall Indian market. As their assets increase over time, so does the clout in the market. Historically, our markets have been vulnerable to the whims of foreign institutional investors. And as these investors quit the market in difficult times, they have dipped. Thankfully, with a rise in the assets, domestic mutual funds have acted as a counterforce against the FII selling.