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Humans invest in different market-linked instruments, to create wealth for their goals, at the time they invest, they decide, they won't panic if their investment will start showing volatility and losses, but this is also a fact that, humans are emotional animals, and their instability is natural, at the time they saw negative returns from their investment, especially at the time when they are very much near to achieve their goal.
Suppose you are an investor, and you have been investing in Equity mutual funds for the last 15 years, with a goal to accumulate wealth for your daughter’s marriage. The big day is on the horizon. On one fine day when you woke up and checked your investment portfolio, you saw, your investment return from the portfolio was down by 10%. To know about the market condition, you went through business news where you saw the economic indicators are weak, and the government is not doing what it should revive the economy.
The whole day you were busy in your daily work routine, but your mind was continuously thinking about the market volatility. The portfolio was down only by 10%, but various thoughts were running through your mind, some positive, some negative. Sometimes you relaxed by saying, “It’s OK. The market will bounce back. Everything will be alright soon” while the next moment you get afraid with the thought, “What if the markets decline further?”
Generally, investors stuck more towards the negative thought, and at this stage, they consider, it would be good if they sell their investment right now with a 10% loss, as if the market decline further, they may have to face big losses.
They are aware of the famous market rule, “but when it is low and sell when it is high”, but at this stage, their priority is to save their hard-earned money, by any means, and this leads to panic selling of their investments. This panic selling costs investors big time.
Investors are not that stupid and are aware of the golden rules to earn a good return from their investment in a mutual fund, so here the question arises why do they panic and end up doing the dumbest of things? Well, there can be two reasons for this, let us understand:
1. No Emotional Resilience
For investors, the most important thing is to manage their emotions, then to manage the volatility in their investment. Humans are emotional animals, and surveys say that the pain of losing the money is twice more than the joy of gaining the same amount.
The fear of losing and the greed of gaining more often leads the investor’s investment on the wrong track. People give more priorities to others successful investment stories than their investment objectives, at the time they select a fund to invest, and this often ends them at selecting the wrong fund to invest in, and obviously, the wrong fund, means no expected returns, and high-risk volatility than their risk profile.
When the market goes down, investors, out of them of losing money, start looking towards the ways to save their, whatever left investment, and often end up selling their investment at the low market, ruining the golden rule of investment and ending at loss!
“Individuals who cannot master their emotions are ill-suited to profit from the investment process”- Benjamin Graham.
It has been observed that the people or the investors who are the victims of panic selling, do check their investment returns, and performance too often, which is quite not good for their Equity fund investment. The more frequently you check, the more tempted you’ll be to take any action.
I am not saying that checking your investment return and performance is not good but checking it often can be dangerous. You should review your portfolio from time to time, but not more than four times a year. The main thing here is to understand how to manage your patience, at the time of volatility in the market and so on your investment.
2. Little Conviction in Our Investments
For investors, it is a must to have conviction, have their opinion and faith for their investment, lack of conviction often forces investors to take irrational decisions towards their investment. Borrowed conviction never stands the test of time.
It is always advisable for investors, it is good to take opinions from the experts, from your friends, your colleagues, but at the same time, do your own value research also. Before making an investment, investors must go through value research about the business, its financial statements, growth opportunities, risks, management quality, and valuations. Investors must know why they are investing in particular security before putting money into it.
Your value research not only helps you in picking out the best equity mutual fund for you but also gives you a kind of confidence, that helps you manage your investment, in an easy and smooth way.
Now we are aware of the reasons why investors move towards the risk of panic selling, now let us understand how we can avoid or minimize the chances of panic selling.
1. Understand the equity markets
Before investing in Equity Mutual fund, for an investor, it is a must to understand what is an Equity mutual funds. To know about the same the investors go through many articles related to equity mutual funds, ask their friends about that, more than that, they ask for the same through financial advisors, and then they think they are smart enough to invest in equity markets and reap all the rewards!
They start their investment in Equity mutual funds, their emotions go in their favor, till the market performs good, but their emotions strike their mind when investment faces the consequence of market volatility.
Investors of equity mutual funds need to understand that there will always be the possibility of wars. There will always be the possibility of an economic slowdown. And there will always be experts predicting market collapse. There will always be companies going bankrupt. But Equity mutual funds have gone up in the long term despite all that.
During their investment in Equity mutual funds, investors will experience periods of high returns, low returns, no returns, and negative returns. They must embrace all these phases to get good returns in the long-term. They need to clam down at low returns and negative returns and stay invested until they reach their goal. Understanding and embracing the market cycles will not only give us peace of mind but also help us make the right decisions.
2. Build A Financial Foundation
The smart investing strategies say, if you are planning to invest in Equity Mutual funds, the very first thing you need to do is to build your emergency fund, keep it safe, and then start investing in equity mutual funds for your goals.
This is advised because, in most cases, the reason behind selling the mutual funds, before reaching the goal is the utmost need of money for emergencies.
Having strong preparation for your emergencies will help you endure the volatility and crashes without panicking.
3. Build the Right Portfolio Based on Your Risk Tolerance and Investment Tenure
People invest in mutual funds with the motive to earn high returns from their investment, and we know high returns comes with high risk. So, at the time you pick up a fund to invest, do evaluate your need and risk, and then find the right balance between your reward and risk, after that pick out the best suitable fund to invest. Do not forget to evaluate your investment tenure, they will help you decide how much risk you can hold in your investment.
Investors are there who have a good knowledge of the market, and they can carry their investment themselves, but there are people who cannot do all these on their own. For them, it would be best if they consult a financial advisor.
The financial advisor will work out an asset allocation plan in different assets of a mutual fund, as per your need and risk capacity. Not only this they will also help you to rebalance the portfolio from time to time and regulate your investment.
The most important thing to remember is, you invest your hard-earned money in mutual funds to create a corpus for your goals, and you should focus on achieving your goals, getting unstable at times of volatility is natural but restrict yourself from panic selling off your investment, and stay invested in equity mutual funds for long-term, you will receive good gain. Also, do stuck to the rule- “Buy at low and sell when high!”
You can contact us at Shri Ashutosh Securities Pvt Ltd., for any assistance, we are here to help you in any way possible.
Happy Investing!
(Mutual Fund investments are subject to market risk Illustrations are for example only, there is no guarantee of returns. Past performance is not an indicator/guarantee to future returns).