How can you survive Equity Roller Coaster

How can you survive Equity Roller Coaster

Running with the bulls and lumbering with the bears is quite a skill in the equity market. Two emotions – greed and fear – are constantly at play. History proves that equities, though volatile in the short term, create wealth in the long term. The CNX Nifty and S&P BSE Sensex fell nearly 7% in August, but they returned 13% in the 10-year period ended August 31, 2015. SBI Fund Guru highlights a few ways which can help investors survive the equity roller coaster.

Ways to deal with volatility :

1.Focus on the long term 
Equities historically has done well in the long term. In the 15-year period ended August 31, 2015, the CNX Nifty and S&P BSE Sensex have given annualised returns of 12% and 13%, respectively. Hence, SBI Fund Guru advises long-term equity investments, which evens out short-term volatility. Be patient and staying invested in the market over the long term.

Chart 1: Long-term positive trend of S&P BSE Sensex

Source: BSE Website and CRISIL Research

2.Buy more when the market falls 

Rather than becoming nervous and selling investments at a loss when the market falls, accumulate. A bear market will enable you to buy more stocks. At times you can buy good stocks at a cheaper price. Remember, market trends are ever changing and with the turnaround in the overall market, the performance of these stocks will also improve

3.Don’t try to time the market, instead spend more time in the market 

Market timing is a popular investment strategy in the equity market where investors undertake buying and selling of stocks by predicting the future price movement. Timing the market often leads to entry or exit in the market at the wrong juncture. For instance, domestic indices were volatile between January 2011 and March 2013, and after that the course changed. Investors who had stayed invested in the market would have enjoyed superior returns from September 2013 onwards. Hence, SBI Fund Guru recommends you to spend more time in the market to garner better returns.

4.Diversify your portfolio 

Several domestic and global events tend to impact market direction, leading to changes in the underlying stocks. The performance of different sectors varies across time and investors should diversify across stocks and sectors to optimize gains and limit the downside. Diversification should be in line with the risk profile, investment horizon, returns expectations and ongoing market conditions. Don’t over-diversify as it does not reduce risk, which is the principal goal, but increases costs and lowers gains from upside in any stock.

6.Subscribe to equity mutual funds 

Direct investing in equities helps to garner superior inflation-adjusted returns but can be risky. All investors do not have high risk-bearing capacity. Equity mutual funds have variants catering to different risk appetites and they offer perks of convenience, liquidity, tax efficiency, diversification and professional management.

Table 1: CRISIL AMFI – Equity Fund Index versus benchmarks

Index	3 years (%)	5 years (%)	7 years (%)	10 years (%)	15 years (%)
CRISIL - AMFI Equity  Fund Performance Index	21.99	11.58	13.92	15.47	17.37
CNX Nifty	14.87	8.09	8.99	12.82	12.32
S&P BSE Sensex	14.67	7.90	8.79	12.90	12.52
CNX 500	17.32	8.00	9.69	12.10	13.28

Returns as on August 31, 2015 and for period greater than one year are annualised returns Source – CRISIL Research

CRISIL-AMFI Equity Fund index, representative of the performance equity mutual funds has outperformed the CNX Nifty and S&P BSE Sensex across time frames, in the 10-year and 15-year period ended August 31, 2015, CRISIL-AMFI Equity Fund index surged over 15% and 17%, respectively, compared with the CNX Nifty’s 13% and 12% returns in the same period.

7.Create wealth with SIP 

Investors can systematically route their investment to equities through systematic investment plans (SIPs) in equity mutual funds. SIPs, which allow pre-defined fixed investments at regular intervals, encourage disciplined investment and limit the risk of investing in a volatile asset class. Further, investors should resist the temptation to stop SIP during market downturns as that is the time to gather more units and ultimately create more wealth. Investors should also consult their financial advisers before taking any investment decision.

Summing up:

Do not get affected by the short-term fluctuations of the equity market. Hold on patiently over a longer period to reap returns. Wisely choose stocks or funds which are in line with your risk bearing ability and financial goals.

Happy Investing