Hello Readers!

Recently, the United States killed a top Iranian military commander general Qasem Soleimani in an airstrike in Iraq on Friday (03-Jan-2020), after this Iran declared that they will not abide by restrictions imposed by the Joint Comprehensive Plan of Action, known commonly as the Iran nuclear deal – including limitations on its enrichment of Uranium. Also, on Wednesday, 8^th Jan 2020, Iran launched missile attacks on US-led forces in Iraq in retaliation. After this, President of USA, Mr. Donald Trump, though his speech, showed a softened stance of no further military confrontation with Iran and said he was ready to embrace peace. Well, this is the whole scenario of US-IRAN tension, which is not only giving an impact on these two countries rather it is affecting the whole world.

The matter is not confined to war, and its effects, but it is imposing effects rather say drastic effects on the international market. The last few days have seen a sudden rush in gold and crude oil prices internationally and have increased volatility in equity funds.

On 6^th Jan 2020, the Nifty was down by 1.9 percent on concerns of a possible increase in oil price, on 7^th Jan 2020, Nifty was up 0.5 percent, whereas again on 8^th Jan, Nifty experienced a downfall by 0.2 percent. On January 9, Nifty was up by 1.6 percent.

This continuous events of down and rise experienced by Nifty, results in high volatility in Equity Mutual funds, but the question is, what should be the next step of investors? How should they react? What should they do to save their portfolio from this volatility? Let us know everything in detail.

Should You Be Worried About the Volatility?

Through records and surveys, it has been observed, there has been total, 540 days out of 7,060 days, since 1991, when markets have fallen much more than 2 percent. If we average it out, then a daily fall of more than 2% has happened once every 13 days since 1991. Well, that’s much, but as an Equity investor, you already know that volatility is business as usual for equity markets.

Now if we talk about events like war and their impact on the market, then you must be knowing that every year we have a few events about which the market is worried, and these events are not pre-planned. Basically, you can say that we are never crisis-less. Some crisis leads to temporary corrections, some do not. There are stories of equities providing decent long term returns despite the scary headlines for the last 30 years!

That means if we conclude, then these volatilities and temporary market correction, do not result in financial loss, until and unless you sell your investment, during these crisis times of the market.

What If the Tension Converts into Full-Fledged War? What Will Be the Impacts on The Market?

Well, the previous records and studies of different geopolitical events show that the impact of these events on market is short-term, but here it is questioned what will be the impacts if the US-IRAN tension converts in a war. We all know, it is hard to predict what will be the next possible situation of US-IRAN tension. Moreover, even if we somehow knew what the next event will be, we still wouldn’t be able to predict how the markets will respond to that.

Market experts, avoid to predict the market condition, because of two possible challenges:

1. Geopolitical events by their nature are unpredictable

Nobody knows what is cooking up in Mr. Trump’s mind, and what will be his next step, so basically, it's hard to predict whether this tension will covert into full-fledged war or not.

2. Market’s reaction to war and geopolitical crises can be counter-intuitive

As it is hard to predict these geopolitical events, it’s also hard to predict, how the market will react with these events, and how the investors will react, as the investor's reaction is directly proportional to market condition. Sometimes the market response to events can be just the opposite of what you think.

It’s Impossible to Predict, But We Can Prepare

When you get to know that you can’t predict and control, the short-term movements in equity market, you realize, that you actually get more control, this is because, you suddenly start searching ways, and start thinking of a strategy to “prepare” for a wider range of outcomes rather than for a single outcome that you are trying to predict.

Now the question is how you can prepare yourself. This can be done through some basics.

• Make sure the money for goals needed in the next 5 years is not into equities, rather these should be in Debt funds.
• Make sure you have an emergency fund to cover for at least 6 months of your expenses
• Is your current asset allocation diversified and your various asset classes such as equity, debt, gold, etc. are performing in line with your risk appetite or not?

Now if the whole US-Iran tension subsides, then don’t panic, simply leave your portfolios untouched to compound in peace.

If Markets Fall Due to Some Unexpected Turn of Events, Should You Sell Now and Enter Later?

Well, this is the most dilemmatic question that arises in every investor's mind, whenever the market faces a downfall, whatever reason would be. If people decide to sell and if the market rises very soon, they regret, and if they decide to stay invested, and the market falls more, then also they regret.

While there is a scene of ‘no one can predict’ people actually predict the fall of the market, as per there intuition, and any further fall of the market, make their intuition stronger, and ultimately they decide, “Let me move out and enter later”.

And when they sell their fund during crisis time of the market, they receive low, and start bombarding the same questions, why investors don’t make returns in equities, blah blah…

And when you get out of it, the issue arises when you think to get back in the equity market. When you think, the equity market trajectory to be a simple straight line, then there are too many false upsides during, and when there is an actual recovery, you think it’s another false and by the time you realize this one is the real one, it is usually too late.

How to Handle This?

When it comes to making decisions regarding your investment, you need to be very much clear with the estimated outcome of your decision. Most importantly you need to have a clear pre-decided plan on WHEN and WHAT decision to take. This will ensure that you are better prepared to take advantage of the market if it falls further. Here I am presenting a sample plan, of what to do to when the recession hits (this can be customized based on your risk profile, time frame, and plan):

• If the market falls by 10% – No action
• If the market falls by 20% – Move 20% from debt portion (intended for tactical allocation) to equities
• If the market falls by 30% – Move next 30% from debt portion (intended for tactical allocation) to equities
• If the market falls by 40%– Move next 40% from debt portion (intended for tactical allocation) to equities
• If the market falls by 50% – Move next 10% from debt portion (intended for tactical allocation) to equities

Is It That Easy to Deal with The Downfall of Market?  

Honestly, it is difficult to handle our portfolio when it is falling and it’s hard to remain stuck with our investment when it shows its worse, but it becomes more painful when you fail to stick to the plan. It may happen that you overestimate your ability to handle a falling market, decides to sell your fund, earns low benefit and in the future, your fund expelled its performance and gave good returns, ultimately you will regret your decision. Basically, when the market crashes, you need to calm down and follow a strategy to overcome your fear.

While we have no clue how the US-Iran tension will work out, even if there is a fall, as long as you have your plan ready and the discipline to execute it, you can convert this into an opportunity rather than a crisis.

Most importantly, always consult a financial planner, if you are afraid of the negative returns of your Investment, at the time of recession. Always make decisions in your investment, after seeking a piece of proper advice from a financial planner.

You can also contact us at Shri Ashutosh Securities Pvt Ltd., 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).