The stock markets have had a great run in recent years. A bull run that began around March 2016, tripped briefly by the demonetisation, carried on till January 2018, at which point the government announced a new tax on Long Term Capital Gains. During this run of two years, equity investors made tremendous gains, while several new investors were introduced to the benefits of mutual fund investing. Now, with the bulls taking a breather, what must equity investors do? How should you invest when markets recede? Here are a few thoughts to consider.
REMAIN INVESTED
If you are not in a hurry to pull your money out from your equity investments, you must remain invested. Increase your planned investment tenure. Many experts believe 2018 would be a rough ride, and it would not be wise to expect a repeat of the brilliant gains made in 2017. However, this period of volatility would also end. Therefore, remain invested till the next spurt of growth.
MUTUAL FUNDS SAFER
If you are not an expert stock picker, investing in equity via mutual funds should be the way to go for you. A typical fund portfolio is hedged against various market risks. You would have seen some banking stocks fall by large margins — as much 50 per cent recently. But you won’t see a mutual fund fall by that much in a short span of time because its exposure to individual stocks is restricted.
CONTINUE YOUR SIPS
If you have been investing in equity via mutual fund System-atic Investment Plans (SIPs), well done. This is your opportunity to make the best of a receding market by continuing to invest. Your recent investments would have lost a bit of value in recent months. This should not worry you. You have a fund manager to manage your portfolio expertly to cut your losses and find avenues for growth. So continue your SIPs. With your fund manager’s expertise and the markets hopefully rising again in the near future, your fund will start growing again.
EVALUATE PORTFOLIO RISK
In the equity market, there are graded levels of risk you can take. Mid-cap and small-cap investments are considered riskier than large-cap ones. When riskier stocks or mutual funds loaded with such stocks crash, they tend to crash harder. If your portfolio has a large exposure to such risky bets, you may want to reevaluate it. If you wish to hold on to these investments, give yourself a longer term to better overcome the periodic corrections.
LOWER AVERAGING COSTS
If you wish to continue betting on your favourite stocks or mutual funds, a market crash presents great opportunities to reduce your rupee average costs. Basically, when you buy your favourite stock or mutual fund at a lower cost, you reduce your average purchase price. When the price rises again, buying at lower prices give you higher profit margins compared to when you don’t reduce your averages (Refer to table).
BOOK LOSSES
If you are in need of cash and want to liquidate your equity assets while they are in the red, you can still cash out and book losses. Your capital losses can be set off against capital gains to reduce your taxable income. If the losses can’t be set off in one fiscal year, they can be carried forward for up to eight subsequent years.
(The writer is CEO, BankBazaar.com)
