Recent market fluctuations have understandably caused concern among many investors, particularly those newer to investing who are experiencing portfolio losses for the first time. In a recent discussion with Vivek Law on The Simple Hai! Show, finance expert Surya Bhatia shared valuable insights into managing these turbulent times, understanding investor behaviour, and providing essential financial guidance.
Understanding Investor Maturity and Market Downturns
Bhatia highlighted that while there’s a common perception of increasing investor maturity, this is not necessarily true for those who entered the market during the post-COVID period and haven’t witnessed significant corrections before. He emphasised that true understanding of the market comes from experiencing both its ups and downs. The recent downturn has revealed that many investors who initially perceived themselves as having a high-risk tolerance have become more cautious when faced with actual losses.
Responding to Portfolio Losses: A Measured Approach
Faced with falling markets, many investors have enquired about selling their investments to book profits or exit the market entirely. Bhatia’s consistent advice is to reassess your individual risk profile, investment objectives, and financial needs. If these fundamental factors remain unchanged, there is often no sound reason to make drastic changes to your asset allocation simply due to temporary market declines. He strongly cautioned against attempting to time the market, stressing that the key to successful investing is the time you remain invested in the market.
Long-Term Investment Outlook and Key Principles
Despite current market anxieties, Bhatia remains optimistic about India’s long-term economic prospects over the next decade or two, driven by strong domestic consumption. He believes that over the long term, the market is likely to deliver returns that outpace inflation, which should be the primary goal for long-term investors. While aiming for exceptionally high annual returns might be unrealistic, expecting a compound annual growth rate (CAGR) in the region of 10-12% is a more reasonable long-term outlook. For those with a long-term investment horizon, short-term market volatility should not derail their strategy. Bhatia advised that for long-term goals, market fluctuations are less significant, and staying invested allows the power of compounding to work effectively over time. Maintaining investment discipline, even during market downturns, is crucial, and avoiding impulsive decisions like halting regular investment plans (SIPs) is essential.
Strategic Asset Allocation: Diversification is Key
Regarding how to allocate your investments, Bhatia generally suggests an allocation of 5-10% to gold as a way to hedge against broader market uncertainty. He underscored the importance of maintaining a balanced and diversified investment portfolio across different asset classes to reduce risk and take advantage of varying market conditions. Investors with a significant concentration in specific areas like mid and small-cap funds, especially if it represents their entire portfolio, should consider diversifying their holdings across a wider range of asset classes.
Year-End Financial Planning
Bhatia also offered important advice regarding tax planning. He highlighted the differences between the new and the old tax regimes and the potential benefits of claiming allowances where applicable. Investors should ensure they utilise available tax-efficient investment allowances before the financial year concludes. Bhatia also mentioned the importance of paying any outstanding tax liabilities on income from sources other than salary to avoid potential penalties.
He also introduced the strategy of tax harvesting, which can be particularly useful in a declining market. This involves selling investments that have fallen in value to realise a capital loss, which can then be used to offset capital gains or carried forward to offset future gains. However, he cautioned that this strategy is most beneficial for those who are subject to capital gains tax and advised investors to seek guidance from their financial advisors or tax professionals for specific advice tailored to their circumstances. Importantly, he warned against selling investments solely for tax purposes and then moving the funds to lower-growth assets, as this would undermine the long-term benefits of compounding.
In summary, Surya Bhatia’s expert advice emphasises the need for a long-term, disciplined approach to investing, grounded in a clear understanding of your risk tolerance and financial objectives. Navigating market volatility effectively involves staying focused on your long-term goals and avoiding reactive decisions driven by short-term market noise. Proactive financial and tax planning at the year-end can also contribute to better overall financial outcomes.
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