Selling shares or stopping SIPs is a common feature when markets are in a downturn. It can prove fatal for your wealth.
As the global markets go through a financial crisis, a sense of panic has taken over the stock markets across the world. The small investors, who have invested in mutual funds and stocks, have been feeling the heat as well for over ten months now.
As the mood swing deteriorates from despair to helplessness, investors would be rather worried about their money. During times like these, when panic takes over, investors have to keep their cool, lest they make decisions that might not be rational. There are some common indicators that will help to identify if you are panicking.
Stopping your regular investment plan: In case of a mutual fund systematic investment plan (SIP), investors put in money every month or quarter to take advantage of an upswing. However, the eagerness to invest goes down considerably when markets fall.
Many even stop their SIP. For instance, an investor who has invested Rs 2,000 a month for 19 months, finds out that the investment of Rs 38,000 is now worth around Rs 30,000. He may then feel that there is no point in carrying on with the regular investment. With only five instalments remaining, this sudden decision to stop investing will lead to a situation where the investor has bought units at a high cost, but does not get the benefit of the downturn. This eliminates the entire benefit of investing through an SIP.
Selling an MF investment: Making a decision to sell a fund when it is not performing is easy. But in a falling market, not many can buck the trend. When redemption takes place because of panic, an investor stands to lose out on good funds.
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The best example is how investors are now moving away from mid-cap schemes that have been badly hit as mid-cap stocks have suffered the most in this downturn. In reality, when you invested in a mid-cap fund, it was with the knowledge that this is a sector that is very risky. And such investments are made with a view that they are of high risk, but give high returns as well.
Offloading on market lows: This is a very common situation. The expectation from investors in such situations is: “I have to cut my losses.” This is something that has been noticed in stocks of financial services and the real estate sector in the last few weeks.
But it is almost impossible to know whether a certain level is at the lowest or there is potential for a further downside or upside. When you buy the stock of a good company, it is very important that you hold it at least for some time (between 3 and 5 years). Of course, it is a completely different issue if such sales have to be incurred to fund an immediate need for cash. But if stocks with strong fundamentals are offloaded in such a manner, such a person is surely a bad investor.
Any price acceptable: This ia a classic case. Selling at any cost is common and it leads to an immediate hit. If it is a good stock, there will definitely be a lot of investors to buy at a low price. With swings of over 12-15 per cent in a single day, the sale may often go through at a price that is considerably lower. In this situation, the investor could end up losing even more than what he would have normally done. This is usually seen when liquidity starts drying up a bit.
Buying to sell for quick gains: Often, investors decide to buy a stock for quick gains or losses. This can be something like the launch of a new product in the market, resulting in better sales and profits or it could be an expansion plan in the future.
While this is a concrete reason for buying a share, it is sold quickly when such plans do not come through. There could be reasons for the delay, especially in a downturn like this, but it leads to selling at a loss. This happens when certain stocks are not a part of the portfolio for long-term gains.
There are times when investments are made in stocks or mutual funds and things do not work out because there is a change in the fund manager or the stock/sector’s fortunes may not look good in the long run. Any decision to move out of them could be considered valid. However, any knee-jerk reaction to get in/out of the market can prove to be very fatal for your wealth.
Investing in stock markets, whether through mutual funds or directly, requires a lot of discipline and heart. For ones, who get easily get swayed by a sharp fall or rise, are not able to reap returns when markets turn around.
The writer is a certified financial planner