With equity markets at their volatile best, doomsday scenario predictions are doing the rounds thick and fast. When the BSE Sensex was hovering around the 21,000 levels in the month of January 2008, irrational exuberance was the order of the day. Then, few investors would have foreseen a fall of over 30 per cent in the ensuing 6-month period.
Expectedly, the exuberance has been forgotten and despondency has set in. So what should investors do now? Remember the cliche - when everyone around you is losing his head, it's a good time to keep yours. Now's the time to put that in practice. In this article, we present a 4-point checklist of things to do now.
Get a reality check
The volatile market conditions have presented an opportunity to get a reality check. In times of euphoria, the 'noise' from various quarters can make investors lose focus of their investment objectives and plans. Now is a good time to critically evaluate your investment portfolio. The present market volatility only underscores the high risk associated with equity investments.
Decide if you should be invested in equities and if yes, what portion of the portfolio should be allocated to equities. Similarly, put all your investments under the scanner and assess if they are right for you i.e. do they match your risk appetite; also, are they equipped to help you achieve your investment objectives? Earmark the ones that don't fit the bill and rid your portfolio of them at an opportune time.
Make fresh investments in a staggered manner
If you have identified investments that are right for you, now is the time to add to them. For example, if you have well-managed diversified equity funds/balanced funds in your portfolio, you should consider making additional investments in a staggered manner.
The systematic investment plan mode of investment has always been our preferred investment mode. In times like now, the benefits of an SIP investment become apparent. If you haven't started an SIP as yet, now is the time to get started.
Tax-planning investments are often erroneously reserved for the last quarter of the financial year. If tax-saving funds (also referred to as equity linked savings schemes) are your calling, now is the time to get invested. On a related note, the willingness to make fresh investments at this stage will test your resolve as a 'true blue' long-term investor.
Evaluate your investments
We have always maintained that a fund's performance in volatile market conditions is the true test of its character. Now a 6-month period may not necessarily be an appropriate time frame for drawing conclusions on an equity fund's showing, however, it can certainly offer glimpses into the fund's nature.
Furthermore, now is the time to evaluate how honest the fund is to its stated investment mandate. For example, find out if the mid cap fund that professed to invest solely in mid cap stocks still continues to do so, or has it chosen to allocate a smaller portion of its corpus to large cap stocks to cut losses and vice-versa.
Similarly, check if the fund that declared that it would be fully invested in equities at all times, has allocated a substantial part of its assets to cash/current assets in a bid to steer clear of volatility. As with investors, testing market conditions also reveal the true nature of funds.
Assess your investment advisor
Now is the time to critically assess your investment advisor. We believe that an investment advisor's core job is offering advice; delivering application forms and cheques i.e. the service aspect while important is secondary. When the markets were surging northwards, did your advisor aggressively recommend investments in equities or did he urge you to adhere to your asset allocation?
Also, was he prompting you to take on higher risk in a bid to clock higher returns or did he advise you to invest in line with your risk appetite, irrespective of the market conditions? If on both counts, the advisor was recommending the former, there might be a case for reconsidering your association with him.
Finally, another cliche - behind every obstacle is a hidden opportunity. If you are a long-term investor (read investment horizon of at least 3-5 years), the present volatility should be seen as an opportunity to build for the future and not an obstacle.
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