Source/Contribution by : NJ Publications
The Indian equity markets witnessed a lot of commotion lately. Both major Indian indices, the Sensex and Nifty are being erratic, sliding downwards for the past few weeks. The Sensex was trading at just below 39,000 at the beginning of September, after a month it's down more than 4,000 points, trading at less than 35,000.
Naturally, investors are worried because their investments are falling in value. Their anxiety is further augmented by a negative sentiment around, triggered by media reports and opinions of family, friends, neighbours, colleagues, and possibly everybody in the vicinity as falling markets is the hot topic currently.
So, amidst their shrinking investments and societal pressure, how do you explain to the poor investor, that there is absolutely no reason to be worried about, things are going perfectly as per the financial plan.
And this is not uncommon that you are encountering terrified investors, over your career everytime there is volatility, there is media and peer pressure, the investors are worried, they want to redeem their investments to cut further losses, they might even blame you for their loss.
With markets slumping, this scenario is a test of time for you as a financial advisor. One of the most crucial roles of an advisor is handholding the client in turbulent times. So this piece concentrates on how you can pacify your clients and not let them take a decision out of fear of loosing money.
1. Volatility doesn't mean Loss. One thing that you need to make your investor understand is, volatility doesn't translate into losses unless he sells his investment at a low price. The risk arising out of volatility in prices, is limited to the time being, the risk subsides as the investment period increases to long term. Say for instance, the investor invested in a fund when the NAV was Rs 100, after the upsurge it went upto Rs 140, post the market crash it went down to Rs. 90, so you must convey to the investor that this fall in NAV is not a permanent phenomenon, it can upto Rs 100 or Rs 120 in the coming days, and there is also a possibility that it can do down further to Rs 80 or Rs 70. Sentiment and external factors can influence the NAV, but temporarily, over the long term, the NAV will grow because of the underlying companies' potential.
2. Data: Statements won't work until you back them up with numbers. So, have your historical facts and charts handy, show to the terrified investors the historical numbers of global equity, Indian Equity history, and explain to them that it's not the first time markets are volatile, they have always been this way. Highlight the times when markets were going bonkers, there have been periods worse than this, there were wars, global economic slowdowns, scams, natural disasters, political instability, and all these factors pulled Equities down, but eventually everything fell in the right place. Over long periods of time, equities have overpowered all hurdles to emerge as the most rewarding asset class. Ask them to consider any 10 year period from the birth of Indian Equity, investors belief in their investment didn't go in vain.
3. Volatility is an opportunity to invest. Ask your investors one thing, 'What do you do when there is a 50% discount sale at the mall?' You have to do the same here, volatility presents an opportunity to gain, in the form of low purchase prices. You are getting many quality stocks in your Mutual Fund at a lower NAV, which will boost your profit margin from the investment over the long term.
4. They invested for their goals which are still far away: Remind the investors who are considering
disposing their investments to avoid further losses, about their goals, which is why they invested in the fund. Points 1 and 2 above will explain that NAV fluctuations are temporary, and bringing their attention to their goals will support the need to refrain from taking a decision hastily.
5. Prepare the investor for volatility shocks. The first thing to do when you have a client onboard is acquaint him/her with the risks associated due to volatility, which is nothing but a summary of the points above. This activity will mentally prepare them for such days, in most cases the investor won't panic because he sort of expected the downturn. And showing the flip side also exhibits your credibility, since you are not presenting only the rosy picture to the investor, rather you are being ethical and helping the investor take an informed decision after counting in all the risks.
For an investor, ignoring the noise is easier said than done, because the idea of losing money is frightening, accompanied with negative statements being bombarded from all sides can make him lose his mind. It is your responsibility as his advisor to calm the panic stricken investor, explain the reasons, show the way forward and and ask him to stick to his financial plan.
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