It may be bad times, but not for long-term investors who invest in a disciplined manner

Rajiv Shastri

While the fall in market indices has been unusually sharp after the Union Budget, it is increasingly apparent that the budget itself played a very small role in it. This is also clear from the fact that on the budget day itself, after all the announcements were made, the markets did not really fall. The correction in mid and small cap indices had started well before the budget and that in the large cap indices started the day after. And there are many reasons to be circumspect about this small correction that we have witnessed.

Firstly, there has been growing concern with valuations over the last few months, especially in the mid and small cap categories, with the latter (BSE Small Cap Index) trading at more than 100 times earnings. Secondly, despite these concerns, liquidity continued to drive the markets higher through the month of January. From the beginning to the end of January, the Sensex gained more than 2,150 points. Thirdly, equity markets have risen through 2017 and January 2018 without a meaningful correction.

As a result of this virtually one way movement, volatility indicators were at abnormally low levels which bred a sense of complacency. Fourthly, a similar situation prevailed in the more developed markets internationally as well.

All of this culminated to a building up of systemic pressure and the market started letting off some steam in the first few days of February. From the peak it touched on January 29th 2018, the market has lost around 6 percent as on February 16th, 2018.

So, putting this in perspective, only those who have invested in the last one month may have lost some money. Investors investing through Systematic Investment Plans (SIPs) would find that only the last instalment of their series has lost a little bit, if at all. Those who have invested at the January 29th peak have lost less than 6 percent. This is not the doomsday scenario that it’s being made out to be.

However, market conditions have changed. Volatility indicators are now back to their long term average or slightly above from the abnormally low levels where they have remained in the recent past. This implies that the Indian as well as International equity markets will start behaving normally again and start moving in both directions.

As such, investors and advisors who believe that equity investments are capable of generating linear returns over short periods of time would be best advised to revisit their beliefs. On the other hand, investors who invest in a disciplined manner for the long term have nothing to worry about, as always.