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3 Things Common To Roller Coasters & Equity Funds

We do not have many theme parks in India. Thus, many of us have not really experienced a “roller coaster ride”. Well, the stock market more than compensates for it!

As the indices have grown, the psychological impact of the dips and highs has become larger. Today, a fall of 230 points in the BSE Sensex does not make so much of an impact as we are now regularly seeing 1000 point fluctuations. A 1000 point change today is the same as a 300 point change a few years ago, as it works out to roughly the same in percentage terms. However, a 1000 point fall makes one feel that something is drastically wrong. This is all about stock market volatility.

Add to this the dramatic headlines by Business channels and newspapers. Headlines such as “9 lakh crores of investor wealth lost in 2 days” can have a deep impact on readers who are just about mustering the courage to put their money in equity.

1. Safety Is Important

The roller coaster takes you on a thrilling ride. It takes you to highs and then sudden lows at great speed, sometimes totally turning you upside down. In spite of such huge gyrations, every person on the ride comes back safely. This fact is known to all the people who queued up for the ride. There are safety mechanisms that assure you that you are not falling out even when the ride takes the sharpest or steepest of turns!

2. Mid-way Exits Can Harm More

There have been so many instances where stock markets have been described as “Roller coaster” rides. However, most such instances create a psychological impression of stock markets being risky. This Creates a Stock Market Volatility.

Let us take this analogy to its logical conclusion. I agree that the Stock market is a roller coaster ride. The rise is slow, the fall is steep, there is too much of change in too little time. However, have you heard of anyone jumping out of the roller coaster in the middle of the ride because he or she cannot take the gyrations of the ride? Well, the consequences can be devastating if one ever tries to do that. That is the reason why there is equipment to ensure that you do not fall off, even if you want to. What can fall out could be something that you have put in your shirt pocket and you have not taken care of to hold on to when the curves have been steep or upside down.

In simple terms, complete the ride and wait for your destination. You will be safe and sound if you just stay put. Enjoy the ride with all its ups and downs. Do not jump out of the ride when the turns become steep (Stock Market Volatility), put your safety equipment on.

3. Check the Safety Equipment

A small investor with small amounts of money to invest, many of the times, lacking requisite skills for stock picking and with limited time at disposal to manage the investments, is like a person riding the roller coaster without the safety equipment. Too much is at stake as the small savings appear to fall out of hand. There is a strong urge to get out of the ride, but by then, most of the fall is already over!

Mutual funds help investors invest small amounts of money in a diversified set of securities. An educated, experienced and knowledgeable fund manager keeps a tab on the markets and takes decisions on behalf of the investors. The risk of loss is minimal when money is invested for the long term.

Conclusion

We handle the volatility by doing nothing other than what we need to do irrespective of volatility. We invest in Direct Mutual Funds for the long term keeping in mind our specific asset allocation, continue with our SIP and periodically (read annually) rebalance the portfolio as per our asset allocation. Stay put and enjoy the ride. We know we will reach our destination, safe and sound.

For those looking for some high adrenaline action, set aside 10% of your money in direct equity and play the game. Worst case, that would be the small change that can fall out of your shirt pocket when the going is upside down. But the 90% in Mutual Funds ensures that you are adequately safeguarded.

Happy Investing!

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Ram Kalyan Medury

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