How Market Conditions Can Affect Your Personal Finances

Financial market conditions can change from day to day and fluctuate heavily over time. The financial market crash during the first COVID lockdown saw the Sensex plunge to 25,638 on March 24, 20201  – and yet, just 6 months later, on September 24, the Sensex breached the 60,000 mark for the first time ever2!
Mar 2022
4 mins read

How do these varying market conditions affect your personal finances? Let’s have a look:

The direct effect on you:

If you have exposure to equity through direct stocks or equity mutual funds, the value of your portfolio will be directly linked to the current equity market situation in India. When the equity markets are in a bull market phase, the Net Asset Value (NAV) of most equity mutual funds is likely to go up. In this case, the value of your portfolio will also go up.

For instance, suppose the NAV of a mutual fund was Rs. 30 yesterday, and stands at Rs. 31.50 today. If you hold 1,000 units of this mutual fund scheme in your portfolio, the value of your portfolio could increase by Rs, 1,500. The opposite also holds true – if the NAV of the mutual fund goes down, so will the value of your portfolio.

If you are investing directly in shares, the value of your equity portfolio may rise or fall with the value of the share. If the value of a share goes up by Rs. 50 and you hold 1,000 such shares, the value of your portfolio goes up by Rs. 50,000.

Should you be worried?

The question is, if you are invested in equity, should you be worried about a bear market (i.e. a steady decline in stock prices)? Remember that a stock market crash and financial panic often go hand in hand. Ultimately, it’s all about your patience and how much time you have in hand.

Market conditions and long-term investments:

As an investor, it’s important to understand that you might not need to react to short-term market movements. For example, if you are invested in the stock market, you can avoid selling immediately if the market sees a drop, especially if you think the long-term prospects seem bright.

If you are invested in the equity markets through systematic investment plans (SIPs) of equity mutual funds, you can continue your SIPs even when there is a financial market crash. This is because SIP investments work on the concept of rupee cost averaging. When you invest in SIPs, you invest a fixed amount of money every month in a certain mutual fund scheme. If the stock market goes up and the NAV of the mutual fund scheme goes up, you will automatically buy fewer units of the mutual fund. On the other hand, if the market falls and the NAV of the mutual fund comes down, you will buy more units of the fund. Your cost of investment gets averaged out over a period of time and your investment has a longer period to grow. In other words, if you are investing in mutual fund SIPs for long-term goal financial planning, day-to-day market conditions might not be a major cause for concern.

Market conditions and short-term goals:

When it comes to short-term goal financial planning, market conditions will affect you more. Say your goal is less than two years away. In this case, your investments may not have enough time to recover from a financial market crash today. Therefore, when you are nearing a financial goal, you should slowly shift all your investments to fixed-income instruments like fixed deposits and debt mutual fund schemes that are relatively stable. This could be a smart decision even if there is a bull market run. Similarly, when you are investing for a goal which is about two years away, like a vacation abroad, you may not need investments in equity mutual funds.

The link between markets and interest rates:

To an extent, there is a link between the stock market and interest rates too. The Reserve Bank of India (RBI) controls the money supply in the economy. In the normal course, RBI may want to keep interest rates low to boost growth. But, in some cases, growth in the economy is not matched by the production of goods and services, leading to inflation. In such a situation, RBI raises interest rates to control inflation. This may adversely affect market returns. This is because when interest rates are low, companies can borrow more easily. This can lead to growth and higher stock prices. On the other hand, higher interest rates make it difficult for companies to borrow money and expand. Higher interest rates also affect the profits of companies, since they have to pay greater interest on their borrowings. Moreover, when interest rates are high, retail investors tend to invest more in fixed-return instruments like fixed deposits. They may thus pull out of their stock market investments, weakening the market.

The impact of markets on bond yields:

There is often an inverse relation between the value of stocks and the value of bonds, especially over a longer period. During a bull market, equity provides good returns and hence low-risk bonds become less appealing. However, during times of uncertainty, investors might move their money from high-risk investments like stocks to low-risk investments like bonds. Due to this inverse relation, returns from stock and bond markets may help balance each other out, if you have both in your basket.

As an investor, it’s important to finetune your asset allocation in line with your risk profile, and to keep reviewing your investments at regular intervals. Consult a professional investment advisor for help with financial planning and to help you create a portfolio that can withstand various kinds of market conditions.

Source :

PGIM India Asset Management Private Limited
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