Some of my friends who are into stock markets and mutual funds have told me that a recession is about to hit. I was planning to start my mutual fund SIPs. My friends have asked me to wait for a minimum of 2 months. Should I start now or after 2 months?
These are natural questions when the market is seeing a correction i.e. when it is going down. I get this question a lot from my prospective clients. My existing clients are asking "Should I sell my mutual fund holdings?"
In my 12 years of financial planning experience, I have seen 3-4 market down turns, where the market has fallen by more than 10%-20%. The right questions to ask when you are in such a situation are:
Fear is a natural feeling in this situation. Investing in the stock markets is like being in a roller coaster, when the ride is going down you feel fear but when it goes up you are excited.
Sensex Movement from 2003 to 2007
As you can see from the above picture, there were 3 times when the market corrected more than 14%. This is considered to be a big correction, similar to the one that we are seeing right now.
However, over the longer period, had you remained invested or continued your SIPs, you would have benefitted.
The 3 things that one can never predict from the stock market are:
So there is no point thinking about these questions. By the time the market recovers, you would have lost the opportunity. Your returns will be lower if you invest at a higher value.
Here are some more examples from the recent past where the market recovered after a big correction.
If you had the chance to travel back to those corrections, would you invest or withdraw?
All the past corrections feel like a lost opportunity. All current and future corrections feel like a big problem.
There is a reason to be cautious if you have a large amount to invest in one go. However if you are doing SIPs, then for the same investment amount, you get more units of mutual funds if the market goes down. If your objective is to remain invested for a period greater than 5-7 years then these temporary down turns won't matter, and your returns will be higher.
I'll end my answer with this picture
Happy investing :)
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Sachin Shah is a 30 year old Senior Software Engineer, working at an IT services company in Bengaluru. He and his wife want to plan for their retirement and also want to save for their child's education, wedding and for buying a car.View Case Study