Equity markets in India have remained volatile for quite some time now, some sectors have demonstrated a poor show than others. Further because of SEBI's regulations to restructure mutual fund schemes, to increase the % allocation of large cap schemes in the portfolios, a lot of churning has happened in MF portfolios to effectuate the re-categorization, and the impact is reflected on equity MF schemes and SIP returns too.

The anxiety among MF investors is understandable, since the returns from SIP investments are dropping, the SIP's started in the last one year are in the negative. The new investors who just gave mutual funds a try, are disheartened because of the losses, since they haven't seen the upheavals before. Amidst the grey scenario, a lot of you must be wondering if you should continue your SIPs, should you stop the SIP for some time or may be redeem the investment to cut further losses?

To solve this dilemma, let's first look at the SIP returns from the average of Diversified Equity Mutual Fund Schemes.

As of 30^th Sep 2018; Source NJ Internal

The above are the average return numbers for SIP in diversified equity schemes. As we see, over the past one year SIP in diversified equity schemes has yielded a little less than 11% loss for the investors. While this is the average, the numbers for some funds are even worse, translating to investors making massive losses in these 12 months. The ones who invested 6 or 8 months back are probably the worst hit. But as you move further to 2 years, 5 years and upto 10 year periods, returns are regaining, the numbers have become positive and have gradually risen upto a little less than the 15% mark for 7 and 10 year periods, after making up for the last one year's fall as well as for the past volatile periods that came in between.

The investors who invested in the past one year are the ones who suffered losses, while their mature counterparts have created wealth over the years. But the point to take note of here is, this latter mature set too has made money after facing the short term volatile periods like you are facing now, but they did not stop their SIP's, rather they held on to their investments to witness the growth and create wealth for themselves.

To further untangle your dilemma, let's understand how does an SIP work?

The strength of the SIP mode of investing lies in Rupee Cost Averaging. Each SIP installment of yours fetches you different number of units of the scheme, based on the prevailing NAV. So, when the NAV is low, you get more units of the scheme and when the NAV is high, you get less units of the scheme. This means SIP encaptures the market lows to get the best for the investor, by adding more units to his vault. This is also the answer to your question. If you discontinue or redeem your SIP now, when the market is low, which is an opportunity to buy more units for the same price, the sole purpose of investing through the SIP mode gets defeated. So, you should rather be doing the opposite. Instead of discontinuing your SIP, you should invest more, to get the maximum out of the low prices.

So, to conclude, a slump in the market is not a valid reason to stop the SIP, rather it's an opportunity to invest more, the creases will be ironed out eventually. The best and the easiest thing to do in the current scenario is stay focused, and continue investing. Discipline is the key here, ignore the market noise and stick to your investment objective, which is far far away. As the power of compounding plays the magic, SIP returns over long periods of time can create massive wealth for the investors.

Liquidity is a familiar tune that you would often come across. It is one of the most critical aspects and is behind most financial problems that people land into. Concurrently, it is also one of the most understated elements considered while investing, our focus is usually limited to the returns offered.

So, to begin with, let's understand what exactly is Liquidity.

Liquidity is the ease with which you can redeem your investment and get the proceeds in your bank account, the sooner it takes to reach in your hands, the more liquid it is.

On these lines, Cash and Real Estate can be considered as the two extremes of Liquidity, Cash being the most liquid and Real Estate on the other extreme end of the liquidity line, especially if it is a heavyweight property, that is a lot of value is attached to it.

However, there is a little deviation to the definition of liquidity. Along with the ease, an asset is considered liquid if the price of the investment isn't affected because of the sale.

In case of stocks and equity mutual funds, although you can redeem the investment and have your money fairly easily, yet stocks aren't considered as liquid assets, because of the volatility associated with them. Investment in equity with a short horizon can be risky because markets are volatile, the investment can even fall below the purchase price soon after investing, and you might even end up losing money.

Why do you need Liquidity?

Quite often we see, that a lot of people have most of their money stacked up in assets, which are illiquid and are ideal for long term investing, leaving them with negligible cash or liquid assets.

You must have heard about cases when properties are available at mouthwatering rates if the payment is made in cash or within a very short period of time. Investors redeem their fixed deposits prematurely, and pay heavy penalties on such withdrawals. Some sell their shares or Mutual Fund investments, which they had kept for their retirement, and the proceeds are lower than their investment value.

What leads these people land into such mess?

The answer is lack of Liquidity. These investors sell their investments at below market prices, to meet their urgent money needs like medical emergencies, job loss, etc.

You would not want to land into such a situation. Would You?

The solution to manage the mess is maintaining enough liquidity at all times. However maintaining Liquidity doesn't mean that you don't buy a home or invest in Mutual Funds or other Illiquid assets. You need these assets for your long term goals. Equity for instance has great return potential if you hold the investment for a long period of time.

The point is, you must ensure that you don't need to sell your long term investments for your short term money needs. You must have provided for resources to take care of the latter, this will enable you to hold on to the investment until the opportune moment when the asset has appreciated over time.

You need a mix of both, but you must provide for liquidity first So, before you invest in Equity or other Illiquid assets, having enough liquid assets is paramount, ensure that:

• You have created an adequate Emergency Fund. The Emergency fund should be such that it is quickly convertible into cash. And it must be enough to provide for at least 6 months to one year of your family's living expenses, so in case of loss of income, job loss, etc., you can survive without having to break your long term investments.
• You have yourself and your family covered with adequate insurances. Medical and hospitalization expenses in case an accident or a critical disease, can be huge and beyond the scope of your Emergency Fund, so you need adequate insurances, life and health, to ensure your long term investments are not compromised for such emergencies.
• Keep some money handy for one off expenses like washing machine repair or replacement, car service and repair charges, family weddings, etc. You can park surplus cash in liquid funds or short term debt funds also, to get a better return than saving accounts and at the same time these investments are liquid enough.

While making an investment decision, pay heed to the liquidity aspect of the product. Match your need with the liquidity offered. In some traditional investments, liquidity is very low, like a PPF or traditional endowment policies. You have to wait for decades to get your money back. Also note the process for cashing out, especially if the money is being kept for liquid needs like emergencies.

To conclude, returns can take you ahead in the long run, but make sure you have the necessary liquidity in place to savour those returns. Let not an emergency teach you a lesson. While you are evaluating investments, Liquidity plays a pivotal role and must be considered, along with Risk and Return.

The Indian Equity markets saw one of it's worst nightmares over the past few weeks. In the first week of October alone, the Sensex slipped more than 2,500 points. Overall, the Sensex has shed around 5,000 points since it's all time high of around 39,000 towards the end of August. For the previous few months, Mutual Funds were showing early signs of the storm, owing to ailing mid caps and almost half of the Sensex and Nifty composition were in Red. However, some sectors like IT, and few banking and conglomerates stocks were holding the flag high. But with the recent fall in these stocks, the indices experienced massive jolts.

Markets are volatile because of various macro and micro factors, there is a lot happening around, global oil prices are increasing, US trade war sanctions, depleting Indian Rupee, the recent ICICI loan controversy, IL&FS' potential loan default, etc.

If you look at the excerpts from the experts, you'll come across diverse opinions, some are of the view that the markets may correct further due to the above factors and poor economic indicators, others opine an advancement, they are seeing at the positive growth estimates for the economy.

So, looking at the uncertain market scenario, falling NAV's, varying notions, what should be your plan of action?

Ideally in the current situation, you should Do Nothing.

Volatility is inherent in the markets, Equity, by nature doesn't grow in a straight line, there will be peaks and there will be bottoms, prompted by various factors, like the ones cited above are behind the current bottom. You cannot control it, so if it is not in your hands, let equity only exhibit the show.

Secondly, equities although are volatile, but if you look at the long term performance graph of the Sensex or the Nifty, the growth of the underlying companies and the economy takes over the peaks and the valleys, concurrently registering superior overall returns.

This is because the temporary factors don't determine the growth of Equities, these factors can influence the prices for the time being, but over the long term, the indexes are actually a slave of the underlying companies potential. If the companies grow, the indexes will grow. The Sensex Value on 30^th Sep 1998, was 3,102.29, and exactly after two decades, the Sensex closed at 36,227.14 on 28^th Sep 2018, translating into a CAGR growth of more than 13%. And that was about the Sensex, the return generated by most Equity Mutual Funds in India, is much more.

The best you can do in such a scenario is, Ignore, you don't even have to look at your Portfolio's value, the turbulence will subside and eventually the markets will stabilize, leaving your investments growing over the long term. Consider you have invested in a PPF, the lock-in of the PPF investment is 15 years. Do you keep checking the value of your PPF whenever there is a hike or cut in the bank rates. No you don't do that, rather you wait patiently for 15 years before you get the corpus credited into your account. The same logic applies to your Mutual Fund investments too. Be patient, give them time to demonstrate their potential, and let them fulfill your goals, the reason why you invested in them.

To conclude, amidst the current shaky situation, do what you have always been doing.

For your short term goals: Stick to liquid funds and short term debt funds

For your long term goals:

> Continue your Equity investments.

> Don't stop your SIPs. One of the core factors behind the superior returns generation in the SIP mode of investing is through Rupee Cost Averaging, which means at high NAV you get less units and lower NAVs will fetch you more units of the scheme. So, it's because of these volatile times, when the NAVs are low, you get more units in the SIP mode, which can give a boost to the overall returns over the long term.

So, let the cramps in your stomach rest, don't pay heed to investment recommendations from finance gurus on TV channels or from people around you. Trust your financial advisor, stick to your financial plan and keep moving towards your goals.

Equity and Long Term go hand in hand. Whenever you hear or read about investing in Equity, the concept of long term follows. That we should invest in Equity for Long Term, because Equity is risky in the short term.

But what exactly is this long term? How long is long term for Equity investing?

For tax calculation, any equity investment which is held for more than a year becomes a long term investment. But practically, investing in equity with a one year investment horizon is totally absurd. One year is a very short holding period for Equity investments.

Over the short term, equities are volatile, there are times when stocks have even doubled overnight, but there are also times when stocks have fallen by half over a night. So, the principle of long term stands to negate the volatility associated with equity over short periods.

The following is the BSE sensitivity table, it shows the returns from the Sensex for different investment periods from March 1979 until March 2018.

This table explains what we narrated above, as we see over short periods, both the maximum as well as the minimum returns are on the extreme, but as we move towards longer periods, the returns are stabilizing and the gap between the maximum and the minimum is alleviating. In shorter investing periods, the probability of making losses is quite high, but as the horizon increases the probability of loss significantly decreases and eventually becomes 0. So, an Equity investor in order to get desired returns and maintain enough distance from the the risk arising out of the volatility, must have a holding period where the probability of loss is low or Nil.

So, coming back to the main question, how long is long term?

The longer the better. There is no ceiling to the term long term, the more time you give to your investment, the less prone is your investment to risk and compounding works to generate superior wealth for you. Quite often we come across anecdotes where people totally forgot about their share certificates and made humongous wealth when they eventually sold their investments. In some cases, the investor died and his family got enough money to sustain a lifetime from his Equity investments which he made decades back. There is a popular equity investing strategy which is called 'being dead', that is invest and then forget about it.

Holding an investment perpetually can generate breathtaking returns and create spectacular wealth for you, but may not be practical. You have your needs, you have your goals to be fulfilled, which is why you invested in the first place. Equity markets grow in cycles, there is surge, then there is a steep correction before the markets eventually stabilize. To neutralize the risk in the investment, the holding period must cover all the phases of a cycle, which is generally between 5-10 years.

Generally Indian investors do invest for long periods of time, but mostly in traditional investment instruments. Investors invest in traditional tax saving instruments like PPF and then maintain their cool till the PPF's maturity, which is 15 years. But when it comes to Equity, they will keep checking the prices/NAV's, get tensed when their investments fall or get excited when they are making profits, and eventually end up selling their investments to avoid losses or to book gains. If the investor gives the same amount of time to his ELSS investment as he gives to his PPF, and simply forget about the investment as he does in case of his PPF, he will be amazed by the amount of wealth he could create by being invested in Equity.

Following is a snapshot of the value of Rs 1 Lac invested in PPF and in an ELSS scheme for 15 years.

An investor who invested in an ELSS scheme 15 years back would have made 4.5 times more wealth than an investor who invested in a PPF at the same time. And such superior returns are witnessed in all kinds of equity schemes over long periods, be it diversified schemes, large cap schemes, mid or small cap schemes, thematic schemes, etc. So, like you give time to your other investments like PPF's, or gold or property, if you maintain the same amount of patience in case of your Equity investments also, some of your greatest blessings will come with these investments.