The most important quality

April 14, 2020

The most important quality for an investor is temperament, not intellect."

- Warren Buffett

There are many questions which are bugging many investors nowadays with the way markets are behaving. The most common question which is raised to us is that "I am worried about my investments, what should I do, should I exit the market now?" The virus situation has led the retail investors into panic, many investors are thinking of stopping and redeeming their investments in stocks and Mutual Funds and putting their money in banks. A few of them want to hold their investments.

So, which approach is correct and what should investors do in such a situation? To answer that question let us take a trip down the memory in history.

This is not the first time when the markets have faced such a magnitude of decline. There have been situations in the past since 1991 where at least one event in a decade has led to a crash in benchmark indices by more than 35% in India.

But all the time the Indian markets indices to recover their peak has taken an average of only 16 to 18 months which is faster than US or any other developed markets.

Below table depicts on how the Indian markets behaved during the tough times in the past.

BSE Sensex	Magnitude of Decline	Peak to Trough (Months)	Recovery Time (Months)	Reason for Market Crash
1992	-45%	12	18	Harshad Mehta Scam, Market Manipulation
1997	-38%	15	8	Asian Currency Crisis
2000	-57%	14	26	Dot-Com Tech Bubble
2008	-58%	14	20	US Mortgage & Credit Crisis
2020	-30%	1 so far	?	Disruption due to Coronavirus
Average	-50%	14	18	-

On average the peak to trough fall is 50%, it usually takes 14 months for markets to fully bottom out & takes 18 months on an average to fully recover to previous peak.

Here are the few things that a stock market or a mutual fund investor should do under the current market scenario.

Don't panic and stay invested – This advice is for the long-term investor. The market goes up and down but in the long run it is likely to perform better and provide good returns to the investor. In short term due to volatility your portfolio may lose shine and drop in value for the time being but if you have a longer time horizon of 5-10 years don't get dis-hearted by bad news and stay invested. You are bound to recover and make better returns on your investments.

Avoid redeeming your Mutual fund investments – Many investors make this mistake of redeeming the funds when the markets are falling. They think it is better to get out of the markets at this stage and re-enter when the market starts to recover. But it is almost impossible to time the markets. Also remember the losses you incurred are notional losses unless investments are redeemed. Once you redeem the funds you will end up making actual losses.

Invest in funds with a strong business portfolio - Investing in businesses with strong fundamentals and a healthy portfolio is of utmost importance. Such quality companies will create wealth because even after a sharp decline they have shown strength with their prices always inching higher. In the long run, when things are under control, markets will recover and the same businesses will be fairly priced again and your portfolio will reap better returns.

Invest in Mutual Funds via SmartSIP – As you know that you can earn in the market if you follow – Buy low & sell high principle. Investing in SIP does not give you this advantage, upgrade to SmartSIP - in this investment are done automatically either in equity schemes and in liquid schemes based on the signals generated by considering the margin of safety index.
- Smart SIP invests your monthly SIP amount in Equity Mutual Funds units when the markets are fairly valued and doubles your monthly SIP amount when markets are very undervalued.
- Smart SIP skips fresh investments in Equity Schemes when markets are expensive and books profits/sells a part of your existing equity units when markets are very expensive. The sale proceeds and monthly instalments are invested in Liquid Schemes.
- Smart SIP skips your investment in Equity Scheme Units and parks the SIP amount in Liquid Schemes which is later used to buy equity MF units when markets become inexpensive.