Dhirendra, equity markets are in a wobbly state and people are wondering what to do about their SIP investments. What is the reason behind the negative returns?
Dhirendra: The reason is that markets are cyclical. Though equity has proved to be the best performing investment class over the long-term, five to 10-year period, it never happened in a nice smooth straight line. Equity helps you earn more than a fixed-income product and beat inflation over the long term, but that doesn't mean year-on-year returns generated by equity is higher than fixed income.
It actually doesn't happen in a manner that you earn 12 per cent every year. It is not a 12 per cent yielding fixed deposit. What happens is that the mix of ownership and diversification helps you earn higher returns over a long period of time. Diversification reduces the risk, while ownership helps you earn more returns. And in the interim, markets remain like this.
But new investors get shaken by this. And this is why we have been emphasizing that first-time investors should start with a balanced fund because these don't crumble the way pure equity or small- and mid-cap funds do.
Equities will be like this only. Some years it will go up dramatically and some years it will struggle. We are in the struggling phase right now. If you remember, in 2017, small caps went up by almost 50-70 per cent. And also, over the last few years, the 'Mutual Fund Sahi Hai' campaign has been quite successful. So a lot of new mutual fund investors got started with investing. But this year and even the last year has been a struggling phase. So all those new investors have become anxious. It is quite unnerving for them. But I would say investors should take a lesson from this. And they should actually be happy that they are buying cheap. This is nothing unusual. Over a course of 10-15 years, markets may see a similar phase again, and would also see a boom.
However, it is disappointing to look at the fundamental things right now. Many sectors are struggling and that is why stock prices and the market is down. Automobile sales are declining dramatically. If they sell less cars, there will be less profit and so the stock price will get affected. Economic numbers are also bad. The situation is more disappointing than what it has been and what was expected. But I think it's part of the game and just a phase.
There is no point in stopping your SIPs. To earn good returns, you need to invest through the bad times also. This is an important time to invest. Keep calm and carry on.
But it's really difficult to do so. It is very disheartening to see the value of your hard-earned money fall so much.
Dhirendra: That's the price that you have to pay for being wealthy over a long period of time. If you think that there's a guaranteed way to become wealthy in one-and-a-half years' time or two years' time and you could time it perfectly, I am sorry you'll be disappointed. In fact you will get poorer because if you try and time it perfectly you will end up doing the wrong thing. You will actually make a mistake.
The only silver lining that you mentioned is that we would be buying cheap. Can you elaborate on that?
Dhirendra: Yes. You would be buying cheap. Also, I feel that the market is attractive as you'll be buying good businesses that are otherwise very expensive, cheap. There is a part of the market which has high-quality companies and they will continue to do well. They may do little poorly in comparison to how they have been doing in the recent past. But the markets take a very knee-jerk reaction to such things.
For example, a wealth builder company which has been growing at 25 per cent for the last 25 years, is now likely to grow at 22 per cent. But the market will discount dramatically. Even the stock price will fall by 20-40 per cent.
So that's the price of becoming really wealthy. You have to take contrary decisions. You have to really overcome fear and continue investing.
So if one has to summarise your advice, what would be the Dos and Don'ts of investing in SIPs right now?
Dhirendra: If it's your long-term money, invest only in equity. Be systematic and regular. If you are investing in equity for the first time, go with an aggressive hybrid fund only. If you have invested in equity before and have experienced volatility, you may invest in an all-equity fund.
And don't stop your SIPs. This would be a bad time to do so. You might make your losses permanent by stopping or redeeming your investments.
Click here to register for the forthcoming episode of Investors' Hangout and post your question for Dhirendra Kumar.