How To Cope With Extreme Market Volatility?

The week gone by (March 9-13, 2020) has been an extremely volatile one for stock market investors. The Sensex lost 2,919 points on Thursday (March 12), wiping out of Rs. 11.4 trillion in investor wealth within a day.

- Sudipta Mitu

The next day it recovered 1,325 points. Several factors – the rapid spread of the Covid-19 virus in the United States and Europe, the crash in crude oil prices, and the domestic Yes Bank crisis – have combined to create the perfect storm in the stock markets. Here are some rules that one needs to follow in order to navigate bearish markets.

Equities are for the longterm: When you invest in equity mutual funds, you should do so with at least a seven-year horizon. Any money that you could need in the medium- or short-term should not be invested in these funds. Investors who have followed this rule will be able to sail through volatile markets with a high level of calmness. If you don’t need the money now, why worry about interim volatility?

Continue with your SIPs: The worst mistake you can commit in such times is to stop your systematic investment plans (SIPs) in equity mutual funds. The only bigger sin than this would be to withdraw money from your equity funds. If you withdraw money, you will make concrete what are only notional losses at present. If you keep your SIPs going, each installment will buy a higher number of units when the markets have fallen. This will go a long way towards improving your returns. Volatility actually works to the advantage of the longterm investor who invests systematically.