In the last few days, coronavirus has created havoc. It has put a pause on your travel plans and other entertainment plans. After the declaration of coronavirus as a pandemic, everyone is on alert mode.
Not just that, it has also impacted global stock markets including India. For the last few days, the stock market has declined significantly from the current levels. The outbreak of coronavirus or COVID-19 had made a lot of investors panic.
But it isn’t the first time that the stock market has been reeling under a virus outbreak. The stock market had been hit by SARS, Ebola, Zika earlier. But the market regains back its value and soars higher.
But before you take any major decisions, wait and check before you take any decision.
Here are some of the things that you can do in the current cycle and be prepared for rough times.
Events like virus outbreak and geopolitical situations hurt the equity markets. Investors become cautious and move their money to safe-haven assets like gold.
However, stay away from making hasty decisions. It can hurt your portfolio. Take a look at your long term goals. Have your long term goals changed? If your long term goals are intact, then staying invested is likely to be the best investment strategy.
Also, take stock of your near term goals. It is important to closely monitor the performance of your short term goals as you will need money to fulfil your short term goals. If you are anxious about completing your goals and have built a healthy corpus, you can look at shifting some of your assets to safer alternatives like liquid funds, fixed deposits etc.
Systematic Investment Plan (SIP) is a popular method of investing in mutual funds. Most people start investing in mutual funds through SIP when the markets are on a rising trend and stop their SIP when the equity markets are going through a downturn. Many investors also take the drastic step of withdrawing their entire investment.
However, taking a drastic measure may be detrimental to your financial health. It can turn your temporary losses into a permanent loss.
Let us take an example. Three friends, A, B & C started investing Rs.5,000 per month through systematic investment plan(SIP) to fulfil a 10-year financial goal.
Five years into their investment journey, the markets took a hit and fell 10% in one day. In the first five years, the market gave an average return of 8%. In this scenario, A stayed invested for the entire duration, B stopped SIP but didn’t withdraw the invested amount and C stopped SIP and withdraw the entire investment. After the slump of 10%, the market recovers and gains another 8% return in the next five years. Overall, in the 10 years, the market gave an average return of 12%.
Here’s how the portfolio of A, B and C would look like in the first five years, after the market slump and at the end of 10 years.
Here, we see that as A stayed invested for the entire duration, A goes on to accumulate Rs.11.50 lakhs against an invested amount of Rs.6 lakhs. As B stops SIP but does not redeem the investment, B’s corpus increases to Rs. 4.85 lakhs against the total investment of Rs.3 lakhs.
On the other hand, as C redeems the entire investment, he is not able to gain from the further upward movement of the market. He gains a measly sum of Rs.30,546 against the initial investment of Rs.3 lakhs.
So, we see that stopping SIP or redeeming the entire value is not an idle solution.
One of the advantages of SIP is rupee cost averaging which means that SIP averages out the cost of the investment for the invested amount. As in SIP, the investor invests a certain amount of money regularly, the fund house allocates units according to the invested amount and the market value.
It is important to keep an emergency fund to tide over emergencies such as job loss and health emergency. During a slump in the economy, the job market can slow down and lead to job loses or lower pay. Moreover, during a virus outbreak or such circumstances, if infected, you may have to pay for hospital and other fees. In this scenario, it is better to be prepared with an emergency fund.
Unusual events are nothing new. While your investment and markets can go through a downturn, you can stay protected by following these steps.
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