MARKET CRASHES:-WHAT YOU NEED TO KNOW?

The past few weeks has seen a virtually free-fall in the equity markets. If you have invested in equities, surely you would have known this and would be obviously worried. This fall has been one of the sharpest and quickest in the history of the Indian equity markets.

WHAT CAUSED THIS HUGE FALL?

There have been multiple factors responsible for the pandemonium in the markets. The primary reason being that the Corona virus outbreak was declared as a pandemic by the World Health Organisation. This sounded alarm bells across all major countries in the world. As of today, the virus has spread to over 100 countries. With rising cases in the US and most European countries, the normal economic activity has been severely impacted in these countries. With travel bans amidst infection fears, trade, business, economy, everything has been impacted. Although China is now under control, the shutdown and isolation of China had earlier severely effected the global supply chains. This fear led to massive sell- offs in the global markets in the past weeks. Another international factor was that of falling crude oil prices which negatively impacted the oil economies. Both these factors were on the back of the existing challenges in the economy of slowing growth.

WHAT SHOULD EXISTING INVESTORS DO?

The fall in the markets was sharp and it is in past. However, remember that uncertainty still surrounds us. Existing investors who have already put their money in equities would have seen their portfolios take a beating. Here is what you can do now... 1. Do not panic If there is the one thing you should not do – it is Panic. A lot of investors panic when they see their portfolio falling very sharply. And in this panic and fear, they make the most common and stupid mistake. They sell their investments at a huge loss. Remember, that a loss in equities is just notional till you actually sell at lower prices. Further, since these are temporary situations which we all know will soon come to an end, then why panic and sell? The businesses are as good as they were before? Has anything key parameter changed? No. Let us take an example. Due to corona virus, a lot of hotels have stopped getting reservations including say Taj Hotels. Due to this, the stock prices have corrected by say nearly 25%. The cost of our Taj hotel is say, Rs.1,000 crores. Will the hotel be now available at Rs.750 cores with a discount of Rs.250 crores? What would you do if you were the owner of the hotel and also as a buyer with Rs. 750 crores? Think on this and reflect as to how one generally behaves with listed equities on exchanges which are very easy to buy and sell.

2. Asset Allocation rebalancing

This is the best you can do. If you had an allocation to equity before the fall, check that allocation now. If it has fallen, it is time to move some money into equities to retain the balance. For example, if equity was only 40% of your total investment portfolio, considering all debt, property, bullion, investments and after the fall it is now at say 30% of your portfolio, then 10% of your present portfolio value should be shifted to equities. This is a plain vanilla rebalancing of asset allocation. If you do not have a fixed asset allocation, then perhaps today is the best time to get in touch with your financial advisor and fix an asset allocation between equities and other asset classes.

3. Increasing Equity Allocation

Another smart strategy to adopt is to increase your equity allocation. This is a tactical decision which changes your equity share from a fixed asset allocation. The reason for increasing your equity allocation is the cheap valuations presently available in the markets. The downside risk of fair /high valuations is greatly reduced in such markets and hence it is a good time to allocate more money to equities. Let us think of this situation like a huge sale on Amazon where most of the things are available at a huge discount. What would you do?

4. Increasing SIP Amount and/or Top-up

Following our previous line of arguments, one could also increase their SIP contributions. They could do this by starting new SIPs, starting a top-up on your existing SIP or simply, investing additional lump sum on your funds as when you have the funds. Increasing SIPs is also a good strategy apart from making lump sums. If your SIPs are live, be happy that you are automatically buying at these low levels and timing the markets. These are the periods when SIP investors should be very happy and the exact reason why we recommend SIPs, i.e., to invest in such markets.

WHAT SHOULD NEW INVESTORS DO?

If you haven't invested in equities or have been waiting for the opportune time to enter the markets, then the grand bus has arrived at your doorstep. This is perhaps the ideal time when fresh investments can be made into equities. However, we caution that there is still uncertainty and equity still carries the same risk as an asset class. What we can recommend is that adopt a staggered investment approach and spread your investments over a period of time. No one can catch a falling knife. No one can predict the exact market movements and the market bottoms. What you can do though is to buy on every dip and avoid putting all your cash at one go. Remember, cash is king in this market and you have to make smart choices in this volatile market.