When the future appears bleak, the past provides hope. And the markets have recovered from every past crisis
26-May-2020 •Omkar Vasudev Bhat
The coronavirus outbreak is an unprecedented human crisis, the effects of which are being felt around the world. Not only have the stock markets around the world corrected in anticipation of material business disruption, but life itself has virtually come to a standstill. Governments around the world have announced relief measures, with massive spending lined up. Entire countries have been locked out. The United Nations secretary general Antonio Guterres has called COVID-19 the worst crisis since the Second World War.
Amid such a situation, it's normal for investors to panic and look for a solution. In the month ending March 2020, the Sensex fell 23 per cent, reaching levels last seen in 2016. Though it has seen some recovery since, its daily swings have resembled those of some mercurial small cap. And our leading market index is not alone. Even the S&P 500, which comprises some of the biggest and most renowned multinationals, crashed 12.5 per cent in just one month.
During such times, it's worthwhile to revisit the basics of investing. The timeless principles of investing don't change as per the market direction. Also, when the future appears bleak, the past provides hope. While the current crisis is almost unparalleled, this is not the first time that the market has shown dramatic swings.
Keep a long-term outlook
It is well-known that markets overreact in difficult times. The degree of panic can be gauged by the speed of the fall. From this perspective, the current state of panic does appear to be unprecedented. The graph 'The 35 per cent mark' depicts the number of trading days taken by the BSE Sensex to register a 35 per cent drop. The current crisis took the shortest time (just 26 days) to send the Sensex down by that much. It took much longer to register a similar drop even at the time of the global financial crisis of 2008 and the tech bubble of 1999.
The obvious question that arises next is whether the fall is over or if more pain is to follow. That is unfortunately anybody's guess. One can't extrapolate the future trend from the past data when the underlying causes of events vary significantly. But there's one common thread. The markets did recover every single time and went on to generate wealth for their investors. Within five years, the markets were well on their feet and primed to surge ahead on almost every occasion. And this is true not just when you measure the recovery from the lows but also from the highs right before the crash. In the latter case, SIP investors were the clear winners as they were able to average their investment cost during the fall.
See the table 'It doesn't matter much'. You can see that on most occasions, the five-year annualised returns from the highs before the fall as well as the lowest points have been decent. The data suggests that equity performs well over longer time frames even if you invested at the worst possible time.
Mutual funds to the rescue
When you invest in mutual funds, you don't just get instant diversification but you also stand to benefit from the professional management of your money. In market downturns like the ongoing one, the importance of investing in mutual funds is all the more enhanced. As the graph 'The mutual fund advantage' shows, mutual funds have contained the downside better than their benchmark indices. Also, it is noteworthy that the majority of the funds in most categories have beaten the respective benchmarks, especially in the mid- and small-cap segments.
Domestic mutual funds have not just proved beneficial for their investors but also for the Indian market. As their assets have risen over time, their clout in the market has also increased. Historically, Indian markets have been vulnerable to the whims of foreign institutional investors. As FIIs quit the Indian markets in uncertain times, they have dipped. But with the rise in their assets, domestic mutual funds have acted as a counterforce against the FII selling.
The net investment data of Indian mutual funds available on SEBI's website shows that they have loosened their purse strings as the Indian markets slipped, thus cushioning them. If it were not for them, the fall may have been worse.