If a stock falls from € 100 to €75 by 25 per cent, how much would it need to rise to get back to € 100, the cost price? The response is that the stock would need to go up by 33.33 per cent to return to some $100. Similarly, if the stock declines by 50 per cent to some 50 per cent, it must raise by 100 per cent to regain its original value. If the same stock falls to somewhere 25 by 75%, it will need to gain 300% to recover at its original price, and if it falls by 90%, it will need to go up by 900% to recover.
These numbers make it very clear that the more you lose, the more impossible it becomes to get your original price back. This illustrates the importance of securing your investment portfolio against the downside.
Owing to poor returns in portfolios of investors, the equity inflow numbers and SIP additions for the past two months have suffered to record lows. Such low inflows may not harm asset management firms as much as the pause in daily investment may harm the strategy of an investor to achieve long-term or short-term goals.
According to Vishal Kapoor, CEO, IDFC AMC, despite experts advising that the daily investments should not pause and reap the benefits of uncertainty, investors prefer to halt their SIPs at such periods. The good habit that was created gets negated because of the investment the downside.
IDFC Mutual Fund claims that sticking to your asset allocation will give your portfolio stability. SIP has developed a strong habit among investors to invest in equity funds in a disciplined manner, but most investors retain debt investments to be made as lumpsum regularly later. That can alter an investor’s asset allocation. During volatile markets, fixed income cushions may have blunted or dampened negative returns on equities. But had the investor divided his SIP into equity and debt according to his asset allocation, the investment in fixed income would have cushioned the fall in equity, says IDFC AMC’s Vishal Kapoor.