Yes, the equity markets fell close to 8 per cent from its peak on March 3 until last week. Did you notice it? Unlikely, for it was gradual, with a fall of not more than about 2 per cent a day at the most. This would not have been visible if not for the media bombarding you with stories of unwinding of positions in equities during the financial year end, and the geo-political crisis in Yemen.
Well, that’s how bull market corrections happen. They are not sudden, nor swift; unlike the downturn seen in a year like 2008.
For now, nothing internal in our economy changes, save for the fear of the rise in the price of crude oil. As things stand, the short-term surge may be a knee-jerk reaction due to the military involvement of oil-producing nations in the Yemen crisis (Yemen, by itself, is not a key oil producer). At present, experts do not view this short surge in crude prices as being any ‘turning point’ for the downward trend in crude as supply remains in excess.
While we will have to see what dimension this crisis takes, it is easier for us to look internally and assess where we stand.
In the Indian equity market – the correction, although not too deep, has brought the market close to fair valuations. For instance, the Price-earnings Ratio of the Nifty is at 22 times, down from 24 times on March 3. What does that mean? It means stocks are now less expensively valued than they were earlier. This presents better opportunities for fund managers to pick/average quality stocks.
These corrections are good, necessary, and prevent too much steam/bubble from building up. We will not be surprised if markets slide further from the current levels.
We would also not be too worried by such a correction because, aside of the markets, the reforms of the Government and structural changes are all moving as anticipated, thus continuing to buttress the revival story. Nothing changes there. An improvement in the economic scenario at lower valuations in the markets only spells opportunities.
Still, a correction invariably bothers most investors. We have typically seen investors react to corrections in two ways:
- Some worry and stop/pause their investments / Systematic Investment Plans (SIPs)
- Some others want to plough more money on correction
Of course, quite a few, wisely, stay put!
Here’s what we have to say to the above two categories of investors:
Stay the course
For those who stop their investments or SIPs, our message for you will always be the same: short-term blips hardly matter in the long run. You have to simply stay the course to reap the benefit of equity investing. For those running SIPs, it is more risky to stop investments when markets fall. It is the falls that provide the opportunity to average costs. You deny your portfolio such an opportunity by stopping SIPs.
Do you have to buy on dips?
In the market fall from the March 3 peak, diversified equity funds have, on an average, fallen by 6 per cent. Now that is a decent fall to, say, ‘add more investments’. However, do not apply the ‘buy on dip’ theory blindly. If you had bought a fund recently (through a lumpsum), then the current scenario may provide an opportunity to average.
To illustrate, if you had bought 100 units of a fund whose Net Asset Value (NAV) was Rs. 55, and it has now fallen by 6 per cent to Rs. 51.7, then buying another 50 units would bring down your cost to Rs. 53.7 per unit. So you do average. But had you bought the fund at Rs. 45 a unit, then averaging isn’t going to work; at least not in one shot. And unless the market has a sustained dip, you may actually not average at all. You would have lost some paper profits, yes; but it is better to still be on profits without doing anything. And in the long run, the blip would have been more than made good.
Remember, the principles of averaging work straight enough in a stock – even if you bought it at a slightly higher price than your original purchase price. This is applicable as long as you see value for the price at which you buy.
However, in a mutual fund – which is made up of a portfolio of stocks that is ever-changing, there is no such thing as buying at a “cheap” NAV. Yes, you may average your NAV costs over time, especially when it is linked to market corrections; but such averaging should make sense (as illustrated above).
We said that there is a third category of investors who do nothing in these times of “panic”. They are perhaps doing the wisest thing. If they ran SIPs, they would allow it to average by default. If they held lumpsums for the long term, they would not be bothered by the short-term gyrations anyway. And need we say, they make for successful investors!
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1. How purchasing additional 50 units of an MF at the cost of 51.7 would make an average cost of 53.7 per unit. In my view, it should be 53.35. Pls explain.
2. At original holding cost at 45, then why additional buy at 51.7 does not make sense. The average cost work out to 48.35.
Do you mean that buying at a cheaper price as compared with your historical acquisition cost is a right strategy. In my view, if you believe that there is a value in the market at 55 or at 51.7, then one must continue to buy at more than 10% dip every time. In fact, one would be missing a great opportunity of acquiring additional units at a cheaper price.
Hello Kamal, he first point was when the original cost was Rs 55. THen averaging once works. The second point was when original cost is Rs 45, averaging once will not help. You will have to average at multiple points, below it to help reduce your overall cost. SO the question is can you do that every time? And will you spot such opportunities frequently and at the right time? To my mind, SIPs are much more simpler. thanks
Mam,
Just like current scenario, do you recommend buying lumpsum (or additional purchase in existing SIP) when market is down.
and which category will benefit more by doing this? Mip cap or large cap.
Thanks
Ganesh, Unless you can time your entry on every fip, SIPs make more sense. thanks.
I have been invested with HDFC Equity and Top 200 Growth for past 3 years. I see that their rating has gone down. Many research reports are showing number of ICICI funds on higher growth and exiting these funds. My horizon is 20 years. Do I stick to them or switch to ICICI Discovery or Value growth.
Appreciate your guidance.
Nice article as always, since I personally like the write-up from fundsindia. But some perspective here:
Which class of investors will it impact? Long-term, short-term, punters….
What is the time period of investing – and how does this correction impact? If it is the long-term investor, either they know this, or you help them shed the jitters! For short-term, follow the road map charted.
In spite of telling about simplicity of SIPs, some people still want to time the market! Perhaps a more aggressive article that tells them to be more disciplined is the way 🙂
1. The point being made is that if you are invested through a well performing MF (and not equity stock), then, still, in my opinion, one should buy at a lower entry point.
2. HDFC Equity and Top 200 funds are great funds. If you have longer time horizon, pls. invest and stay invested irrespective of temporary blip in the ratings.
3. I agree with Vidya that unless you are diligent enough to time you every purchase at a certain dip, it makes immense sense to go for SIP.
Thanks
Kamal Garg
How do we say doing nothing is the wisest thing?
Running a SIP across market conditions is the wisest thing isn’t it?
If he knows when to stay PUT, he can easily know when to buy…. so he will be an ideal investor who can time markets… or who can know the Peaks and Valleys of market which can never happen…
Can you please explain…
Regards,
Sunil.
1. How purchasing additional 50 units of an MF at the cost of 51.7 would make an average cost of 53.7 per unit. In my view, it should be 53.35. Pls explain.
2. At original holding cost at 45, then why additional buy at 51.7 does not make sense. The average cost work out to 48.35.
Do you mean that buying at a cheaper price as compared with your historical acquisition cost is a right strategy. In my view, if you believe that there is a value in the market at 55 or at 51.7, then one must continue to buy at more than 10% dip every time. In fact, one would be missing a great opportunity of acquiring additional units at a cheaper price.
Hello Kamal, he first point was when the original cost was Rs 55. THen averaging once works. The second point was when original cost is Rs 45, averaging once will not help. You will have to average at multiple points, below it to help reduce your overall cost. SO the question is can you do that every time? And will you spot such opportunities frequently and at the right time? To my mind, SIPs are much more simpler. thanks
Mam,
Just like current scenario, do you recommend buying lumpsum (or additional purchase in existing SIP) when market is down.
and which category will benefit more by doing this? Mip cap or large cap.
Thanks
Ganesh, Unless you can time your entry on every fip, SIPs make more sense. thanks.
I have been invested with HDFC Equity and Top 200 Growth for past 3 years. I see that their rating has gone down. Many research reports are showing number of ICICI funds on higher growth and exiting these funds. My horizon is 20 years. Do I stick to them or switch to ICICI Discovery or Value growth.
Appreciate your guidance.
Nice article as always, since I personally like the write-up from fundsindia. But some perspective here:
Which class of investors will it impact? Long-term, short-term, punters….
What is the time period of investing – and how does this correction impact? If it is the long-term investor, either they know this, or you help them shed the jitters! For short-term, follow the road map charted.
In spite of telling about simplicity of SIPs, some people still want to time the market! Perhaps a more aggressive article that tells them to be more disciplined is the way 🙂
1. The point being made is that if you are invested through a well performing MF (and not equity stock), then, still, in my opinion, one should buy at a lower entry point.
2. HDFC Equity and Top 200 funds are great funds. If you have longer time horizon, pls. invest and stay invested irrespective of temporary blip in the ratings.
3. I agree with Vidya that unless you are diligent enough to time you every purchase at a certain dip, it makes immense sense to go for SIP.
Thanks
Kamal Garg
How do we say doing nothing is the wisest thing?
Running a SIP across market conditions is the wisest thing isn’t it?
If he knows when to stay PUT, he can easily know when to buy…. so he will be an ideal investor who can time markets… or who can know the Peaks and Valleys of market which can never happen…
Can you please explain…
Regards,
Sunil.