Those who started investing in the last year and a half and did not get a chance to build confidence in the products were the ones that were most affected by the equity market decline in 2018, according to Gajendra Kothari, managing director, Etica Wealth Management (P) Ltd. Many of them had been fixed deposit investors earlier who had moved to investing in equity through mutual funds for better returns. The lower than FD, and even negative returns, in 2018 made them question their decision but did not make them abandon their strategy to add a little risk from equity to earn better returns.
Why long-term investors need to stay the course
“They were concerned about the fall in the value of their investments but did not panic. We have always reinforced the need to remain invested for at least five years to see the benefits of investing in equity and we reiterated that when investors raised their concerns,” said Kothari. However, they have been reluctant to increase their SIP.
Investors who have been in equities for 4-5 years have mostly taken volatility in their stride. They know the benefits of staying invested, even though they saw their returns come down to 10-12% from 14-15% a year ago. These investors were open to making changes to their investments to adjust to market conditions. For example, some of them who are drawing an income from their investments using systematic withdrawal plans (SWP) wondered if they should reduce the withdrawals when markets are down to protect the principal, but were persuaded that it may not be necessary given that over time the markets will even out.
The firm depends on a three-pronged strategy to help investors navigate volatile markets.
The first strategy is to take only as much risk as required. “When an investor’s goals require 10-12% returns, we don’t see the need to invest very aggressively,” said Kothari. “For instance, we stayed away from mid- and small-cap funds and because of that our investors have not seen as much of a fall as could have been in their equity portfolio.”
The second is to protect downside risk, which they consider is an important role of advisors. “In the last two years, we have recommended only systematic entry and exits into equity through systematic investment plans, systematic transfer plans and SWPs. Even when investors wanted to increase STP values in a declining market, we advised against it to avoid a situation of not having funds to invest when markets fell more. They saw value in our advice when the markets fell further,” he said. The decline in the value of portfolios is lower because of a systematic and disciplined approach, Kothari feels.
The last strategy is to be realistic about expectations they create for investors. Kothari feels that over-hyping returns and underplaying risks leads to dissatisfied clients. Setting credible return and risk expectations and then striving to do better can keep clients satisfied.
Kothari goes a step further to assuage his clients’ apprehensions about volatility. He shows them how his personal portfolio has suffered a greater loss than theirs because of his investments being riskier. “It gives them a sense of comfort to know that they are not the only ones taking a loss. And they are convinced to stay the course.”
Your reaction to volatility should be in context of your goals and not taken in the heat of the moment.