When volatility hits the equity markets, a number of investors decide to withdraw their investments from their mutual funds or stop SIP thinking this may lead to a loss. They either decide to move towards more safe-haven assets like gold or just hold on to the cash till the wave passes.
Despite a lot of experts advising against such withdrawals or SIP termination, investors feel safer with money out of the equities during such periods of fluctuations or crashes.
Like in March 2020, when the equity markets tanked due to rising cases of COVID pandemic and weak economic outlook, this trend was witnessed clearly. However, the markets bounced back and performed considerably better for the rest of the year rewarding investors who stayed invested generously.
Data shows that investors who prefer to stay put during a crash or volatility period get better overall returns as compared to investors who withdraw prematurely. A recent report by IDFC Mutual Fund showcases how double-digit returns were generated by investors who did not redeem money during the pandemic.
“Data indicates that, investors who showed patience during the tough times by not redeeming from equity markets but continuing to invest via SIP significantly benefited, as all main indices have turned from negative to positive and generated double-digit returns over both 2-year and 3-year periods,” a recent report by IDFC Mutual Fund stated.
If an investor invested in a large-cap fund in March 2018 but withdrew money in March 2020 after the pandemic hit, he/she would have faced an annualised loss of around 6-10 percent. However, if he/she would have kept the money invested till 2021 March, it would have given annualised returns in double digits, between 11-15 percent.
Similarly for smallcap funds, the annualised loss between March 2018 and March 2020 would have been between 20 to 30 percent, however, just after a year, in March 2021, these would have turned to annualised gains of 5-15 percent.
For midcap funds, withdrawal in March 2020 after investing in 2018 would have given an annualised loss of 15-30 percent. but investment between March 2018 and March 2021 has annualised returns of 8-15 percent.
Thus it is impertinent for investors to keep investing in equity funds despite market crashes or fluctuations. Long-term returns have always been better than short-term returns. In the last one year, large-cap funds have given an average return of around 40 percent, while in the last 10 years large-cap funds have given annualised returns of around 14 percent. Similarly, the midcap funds have given around 50 percent returns on an average in the last 1 year but around 18 percent annualised returns in the last 10 years. Small-Cap funds, on the other hand, have given the most returns around 68 percent in the last 1 year while in the last 10 years, they have given annualised returns of around 20 percent.
On a compounded basis, the annualised returns over 10 years will always be more than even a 70 percent one-year return.
The data clearly shows that continuing to stay invested in equity funds over a longer-term is better than redeeming during volatility periods. One must keep that in mind the next time the market crashes.