These days, whenever we turn on a news channel or visit a business website, the stock market's decline is everywhere. Seeing the Sensex and Nifty in red makes new investors' hearts race. Many panic and decide to stop their SIP (Systematic Investment Plan).
But did you know? Warren Buffett, the world's most successful investor, says, "Be fearful when everyone is greedy, and be greedy when everyone is fearful." In today's article, we'll explore why a falling market is like a discount sale for you and what strategy you should adopt during this time.
1. The Magic of SIPs in Falling Market:Rupee Cost Averaging.
The greatest benefit of investing in mutual funds is that you need not bother about timing the market. And when the market declines, your SIP installment will earn you additional units.
Let's understand this with a simple example:
Suppose you make a SIP of ₹5,000 every month.
When the market was up, the price (NAV) of one unit was ₹100. You got 50 units.
Now the market has fallen and the NAV has dropped to ₹80. Now, the same ₹5,000 will earn you 62.5 units.
When the market rises again (which it always does), these 'extra units' you have accumulated will rocket the value of your portfolio.
2. Long-Term Perspective
If you're investing for 5, 10, or 20 years, a 5-10% decline in the market is just a minor setback.
3. Investors Often Make These 3 Mistakes During a Falling Market (Avoid Them!)
Mistake #1: Stopping Your SIP Mid-way
Most investors stop their SIPs out of fear. By doing so, you miss out on the opportunity to purchase units at lower prices. Remember: a loss does not become real until you actually sell your units.
Errors in the Market Bottoming.
Individuals tend to believe that they will invest as soon as the market declines even more. Nobody is however aware of when the market shall cease to fall or when it will start climbing back. Discipline is the most appropriate thing to do and leave your SIP running smoothly.
Mistake #3: Constantly Monitoring Your Portfolio
When you repeatedly check your losses, you come under psychological pressure and may end up making poor decisions. If you hold a good fund, simply give it time to perform.
4. What Should You Do Now? (Action Plan)
Keep Your SIP Running: Under no circumstances should you stop your ongoing SIPs.
Consider a Lump Sum Investment: If you have some surplus cash available, making a small lump sum investment during this market downturn could be a smart move.
Do Not Dip into Your Emergency Fund: Invest only that money which you will not require for the next 3–5 years. Do not invest your household expense funds or emergency savings in the market.
Check Fund Performance: Verify whether your fund is performing well relative to its benchmark (index). If the decline is widespread across the entire market, there is no cause for concern.
And finally, the mantra of success is patience.
The stock market does not pose a risk, but it is a mirror of the economy of the country. The trend in the market would always be on the increase in a growing economy such as India. The falling market presents you with the opportunity to buy in assets at a discount.
Therefore, do not panic. Stay calm, continue your SIPs, and let time do its work. In the coming years, you will thank yourself for continuing your investments, even during difficult times.
Fundexl Special Tip:
Investments in mutual funds are subject to market risks; however, "time" and "patience" are two powerful tools that can mitigate any such risks. Consult your financial advisor and increase your investments only in accordance with your risk appetite.