Be ready for volatility if you want to invest in equity - English translation of one of my old articles

શેરબજારમાં રોકાણ કરવું હોય તો ઊથલપાથલ માટે તૈયારી રાખવી

The above article was published in Mumbai Samachar in December 2011. Please remember, this was written in December 2011 and not in August 2014.

Below please find the English translation of the same article:

The other day I received a call from a friend, who was concerned about the falling value of his investments – particularly his equity investments. He inquired whether he should stay invested in equity mutual funds and whether he should continue his SIPs in those funds, when the portfolio value was down even after holding period of over 3 years.

He insisted that he needed the money for some expenses that have come up suddenly.  In such a case, there is no argument and one has to take money out of investments to fund the expenses.

While we were having the discussion further, he asked if he could consider investment in PPF or NSC. I suggested that these are good options but one has to consider the liquidity requirement as these instruments have limited liquidity. He wanted to invest in these debt instruments and mentioned that he had no liquidity requirement. He was ok locking the money for some time.

Now, see the thread between the above paragraphs. Sudden liquidity requirement comes up when equity portfolio goes down, but the same investor has no need for liquidity and is willing to lock money for years.

The fact is, in this it was not liquidity but the concern that was driving the decisions.

Watching the portfolio value going down is always painful for anyone. However, a decision should not be taken because of the pain, but only after a careful analysis and understanding of the situation.

Try to understand your financial condition. Answers to a few questions would suggest if you are in a position to take risks of investing in equity markets. The questions that would help you assess the situation are:

·       Do you have a regular cash flow to fund your regular expenses?

o   Such cash flow could come through your professional income or salary or through investments in form of dividend, interest or rentals or it could be in form of loan, e.g. reverse mortgage

o   How regular and sustainable is this cash flow?

·       In case the above cash flow stops, what is the contingency arrangement?

·       Have you provided for repayment of your outstanding loans and other liabilities?

·       Do you have enough health and life insurance?

·       Can you live your life comfortably without touching the amount set aside for equity investments? If you are going to need this money in the next five to seven years, be more careful.

Equity investments are subject to market fluctuations and hence a small investor must be careful investing in equity. At the same time, in order to create wealth over long period, this is one vehicle that an investor cannot ignore.

Happy investing

-        Amit Trivedi

The author runs Karmayog Knowledge Academy. Views expressed here are his personal views. He can be reached at amit@karmayog-knowledge.com.