Navigating Market Crashes: Should You Continue Investing in Mutual Funds Long Term?
Market crashes can be daunting, especially when the Sensex or any other major indices are in a tailspin. However, is it advisable to continue with your long-term mutual fund investments during a market downturn? This article delves into the wisdom behind investing in times of market volatility and why you should consider this approach.
Why Continue Investing Long Term During Market Crashes?
The stock market is subject to cycles of boom and bust. While it may seem alarming to have your investments crash by 6-7% from recent highs, it's important to remember that these corrections are temporary and can present significant opportunities for long-term investors.
One of the foundational principles of investing is to buy low and sell high. By investing during market downturns, you can lower your average cost per share, which can have a substantial impact on your overall returns over time.
Understanding the Long-Term Nature of Investing
When we refer to long-term investments, we are typically talking about a time horizon of 5-7 years or more. This extended timeframe allows you to weather short-term market fluctuations and benefit from the power of compounding.
It's also important to recognize that in equity funds, there is inherent price volatility. This means that prices can and will fluctuate, sometimes by significant amounts. However, history has shown that while these downturns can be severe, such as a 40-50% decline in a year, they are often followed by significant recoveries in the longer term.
Comparing Mutual Funds to Other Investments
Long-term mutual fund investments have proven to be significantly more rewarding than alternative investments like Bank Fixed Deposits (FDs) or Public Provident Fund (PPF). Even in the aftermath of a market crash, investments in well-managed mutual funds have shown steady growth, often outperforming these more conservative options.
Currently, the Sensex has experienced a 6-7% decline from its recent peak. Given this scenario, it would be prudent to consider investing or increasing your investments while the market is down. This can provide you with the opportunity to purchase more units at a lower cost, potentially increasing your long-term returns.
Warren Buffett's Wisdom
Warren Buffett, the legendary investor, once said: "Be greedy when people are fearful, be fearful when people are greedy." This advice is particularly relevant during market crashes. By purchasing more units when the market is down, you can capitalize on the reduced prices and potentially earn higher returns in the future.
The Importance of Long-Term Perspective
When you accept price discounts during market downturns, you are essentially buying into the best stocks at their most attractive valuations. This can lead to higher long-term returns as these stocks recover and appreciate in value.
Keep in mind that mutual funds charge advisory fees based on the average market value of assets under management (AUM). Therefore, during downturns when your AUM decreases, you still pay these fees on the notional value, which eats into your potential gains. However, during recovery phases, the benefits of reinvesting and buying stocks at lower prices can more than offset these fees.
Conclusion
While it's understandable to feel anxious during market crashes, it's also crucial to maintain a long-term perspective. By continuing to invest or even increasing your investments during downturns, you can take advantage of the discounts and increase your chances of higher long-term returns.
So, the next time the market crashes, remember the wisdom of Warren Buffett: be greedy when people are fearful. Happy investing!