BE PREPARED FOR EQUITY MARKET VOLATILITY IN 2021 AS WELL

2020 was a year marked by extreme volatility. From 41,306 at the start of the year, the BSE Sensex plunged to 25,981 on March 23 as the pandemic-induced lockdowns began.

- Sudipta. Mitu

Even as investors gave in to doomsday predictions, governments and central banks around the world took quick action. They undertook both fiscal and monetary measures, which injected liquidity into the system, and enabled a faster-than-expected turnaround of both economies and the markets. As a result, the Sensex is now up again to 46,006, with a year-to-date return of 11.5 per cent (as on December 22, 2020).

Be prepared for volatility:

One key lesson for equity investors is that the cycle of market decline and revival is likely to be shorter in the future than in the past on account of prompt action by the central banks and governments. Investors should avoid giving in to pessimism when the markets decline. If their goal is several years away, they should continue with their systematic investment plans (SIPs) in equity mutual funds.

Avoid timing the markets: There is a tendency among equity investors to try and time the markets. When they are down in the dumps, as they were in March-April, investors want to exit because they are disappointed with the performance of equities. They believe they should exit when the markets are down and re-enter once they start moving up again. This urge should be avoided. It is better to stay invested when the markets are down. Market revivals are usually sharp and is concentrated within a few days. If you were out of the markets on those crucial days, your portfolio return will lag behind that of the markets.