Market down, interest up. What next?
Alright, so there have been a few changes in our economy in the last few days.
Repo rate has been reduced by RBI
Loans will get expensive (read about why here)
Stock market has already fallen
“Okay, Ankur” you say, “so what am I supposed to do now? How do I manage my money?”
Don’t worry, that’s why you’ve subscribed to this 5-minute finance newsletter. I’ll try and tell you how things will change, and what you can do!
1. If you’re investing for the long term, just relax!
In fact, you can invest more. The stock market is down, which means good quality stocks could be available for a lesser price than they were a few months ago. So don’t panic. However, also don’t just buy for the heck of it, just because the market is low. Take an informed decision and invest in good stocks.
The market will bounce back in a few months, and if you’re invested for the long term (>5 years), you’re going to enjoy this!
And I’m not the one saying this. History is.
Check out the graph of the Sensex in the last 30 years. All the major “low” periods (red arrows) of the stock market are preceded, and followed by “highs” (blue arrows). And that is what generally happens in an economy like ours. Investors are optimistic about India, so unless something goes really wrong with our economy, there’s a good chance of us seeing another high in the near future.
If you’re still worried about whether you should invest, do a Systematic Transfer Plan (STP). How an STP works, is that you first invest some money in a safer, liquid fund, and you then set a defined frequency to move all your money from the liquid fund to an equity fund.
(A Liquid Fund is a kind of mutual fund that invests in short term debt products. Now, let’s not get into what a short term debt product is. For now, it’s just easy to understand that a liquid fund is a mutual fund that invests in products which are safe, such as government bonds, bank deposits etc. So your money in a liquid fund is quite safe)
So coming back to STP - Suppose you have Rs. 1 lakh to invest today. You can invest it in any liquid fund, and set an STP with a periodicity of say, 1 week, to move Rs. 10,000 to an equity fund. So every week, Rs. 10,000 will automatically get transferred from this liquid fund to an equity fund. And the price you will pay for the units of each of these funds, will be the price as on the day of the transfer. So you will have invested in the equity fund at 10 different price points.
This has 2 advantages:
Since you are investing that 1 lakh over 10 weeks (10K each week), the market highs and lows will get averaged out. You will not be investing at a very high or very low price
While your money is in your liquid fund, you will also earn some small returns on that money. These returns will not be very high, but will be better than what you would get if your money was in a savings account
2. If you’re a first time investor, invest in an index fund
Suppose you want to invest in the market right now, but don’t know where to start. The best way, is to invest in an Index Fund. If you don’t know what an index fund is, you can quickly read about it here (But hey, come back here once you’re done reading 😛)
3. What if you’re an existing Mutual Fund investor who wants to withdraw?
I get it. There may be some of you who want to withdraw your money because you need it. But you’re wondering if you should withdraw it now, because the market is so low and your portfolio is down. What do you do?
Option 1: Withdraw only whatever you need, and keep the rest in the mutual fund (duh? Like you didn’t know this already!)
Which is why, there’s
Option 2: Systematic Withdrawal Plan (SWP)
An SWP is a way to withdraw money from your portfolio periodically. Think of it as the reverse of an STP. In an STP, you invest money periodically; in an SWP, you withdraw it periodically over a few days/weeks/months. And the amount of money you get, will be decided based on the rate of the Mutual Fund on the day of withdrawal. So here too, your return gets averaged out, because you will not be withdrawing money on one single day when the market could be the lowest.
Here’s a fun fact: If we were to go by historical data, the best and worst-performing days of the stock market, in any given year, are very close to each other. Check out the data for the last 20 years:
You’ll see that in 14 out of 20 years, the difference between the highest gain and highest loss in a single day is less than 2 months apart. Now while this indicates single-day performance (highest gain/loss in a single day), it gives a lot of hope that the markets could rise sooner than we think.
Again, this can’t be said for certain, but that’s how the markets have behaved in the past.
Point being, don’t panic. Just because the stock market has fallen, doesn’t mean it’s doom. Just relax, stay invested in good stocks and Mutual Funds, and enjoy the ride!
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So, see you next week! Till then, happy money-ing!