The outbreak of Coronavirus pandemic over the last 2 months or so has sent shockwaves through financial markets across the world. Stock markets in major economies have cracked with Dow Jones and S&P 500 falling 11 – 12%. Emerging markets like India have seen bigger corrections, with the Nifty falling more than 25% in just 1 month.
Nifty at historic low
Nifty has fallen to the level where it was in the last quarter of calendar year 2014.
Rebound from lows
In the past, we have seen strong rebounds from market lows. In 2011 the market fell by 28%. From the low in November 2011, the Nifty gave 22.7% CAGR returns over the next 3 years. Similarly, in 2015 – 16, the Nifty fell by 22%. From the February 2016 low, the Nifty have 16% CAGR returns over the next 3 years.
Deep corrections such as the one we are seeing now are great buying opportunities from a long-term investment perspective.
Valuations are multi-year low
Nifty valuation looked expensive at the start of this year but the meltdown in the market has brought valuations substantially down. Nifty is currently trading at 18 – 19 times earnings, closer to the lower end of the range. This should be an attractive investment opportunity. The last time we saw these valuation levels was back in 2012 – 14.
Let us see how much wealth you would have created over a five-year investment horizon if you had invested at these levels. If you had invested Rs 1 lakh in January 2012, 2013 and 2014 respectively in the Nifty for the time horizon of 5 years, in all the three cases your investment would have grown to Rs 1.7 – 1.75 lakhs at a CAGR of 12%.
Should you invest in lump sum or SIP?
One should invest through SIP for their long-term goals. However, deep market corrections provide the ideal opportunity for investing in lump sum. The history of past bear markets and subsequent recoveries indicate that this is a good time to make lump sum investments.
Increase your SIP amounts
If you do not have lump sum funds available, you should continue to invest through SIP and if possible, consider increasing your monthly SIP amounts. Since prices have fallen considerably, you will be able to buy many more units at low prices and thereby reduce your average cost of acquisition considerably. This can generate excellent returns for you in the long term.
Conclusion
Coronavirus is the worst crisis the world has faced in many decades. While the economic outlook is uncertain, the deep correction in the market has created attractive investment opportunities for investors. The age-old mantra of success in stock markets is buying low and selling high – investments made in bear markets give the highest returns in the long term. The on-going correction is a good opportunity for investors to create substantial wealth over a long-term investment horizon.
Source: Advisorkhoj.com