As the son of one pharmacist, my life was going on good. So I know what to do in all troubled times when stocks and other assets start looking terrible. Just relax. All the time, inactivity in financial markets is the best strategy. But recently, Aashish Somaiyaa, The managing director and chief executive officer of Motilal Oswal Mutual Fund, stated something which makes me write this post.

SIP is now becoming a way to earn money for Mutual Fund companies. I agree that stopping is not right and should be based on a goal, but why use money just because you are getting it cheap? Keep that money in the savings bank ( For the time of turmoil. I also agreed that equity is the best asset class. but not always). You will earn at least some interest, whereas shares may make your investment a loss for some time which may affect your mental preparation. But one drawback of SIP is it does not manage market risk. It only gave you an entry point. So if your total portfolio is 10 lakh and the market crash tomorrow, your whole 10 lakh is at market risk, and NO MUTUAL FUND PEOPLE WILL TALK ABOUT IT.

In one program of BloombergQuint, he mentioned that don’t just SIP but gulp. For those unaware of such terms, he means to increase your per month investment value or pour a big chunk once. In the first view, it looks like a marketing strategy for me. But a person who took twitter fights to him and aware of the drawbacks of SIP, I believe I must tell my readers what it means.

First, SIP, Systematic plan, or Dollar Cost Averaging is nothing but investing your money slowly and making an extensive portfolio with keeping a plan in hand. It simply makes you keep supporting. Consistency is a critical thing in investing. But in my personal experience, it is of no use when the prices of shares increase or decrease consistently. If the crash is drastic, which it is right now due to coronavirus, SIP is useless. Better advice at such a time is, “Whole capital market is falling knife. Don’t touch anything which you don’t know about.”

I am telling you this because I know ( and I hope that Aashish Somaiyaa also knows it) that shares are not a piece of paper. They are part owners. The share will gain if the company earns a profit and does good. But, on the other hand, if the company does not make a profit, the share is supposed to fall.

Now fix one statement in your brain.

“In the short run stocks are beauty contest. But in the long run, they are weighing machine.”

If the company will not earn any revenue, how can it make a profit? Right now, when the consumption in the economy is not looking good, the world is facing the possibility of a recession. It may be because I always took shares as part-ownership in the company.

When you are buying a share, you are buying cashflows DISCOUNTED AT a CERTAIN RATE OF GROWTH till the company is alive or you sell it, whichever is earlier. Some companies don’t make dividend payments, but they make their assets grow in any situation the shareholders own. In a case where the consumption is expected to SHRINK, profits are not assured, so the risk increases. So Investors ask for either an increased dividend or less share price. The dividend can not be increased so that the share price will decrease.

The shocking thing here is Motilal Oswal doesn’t hold any consumption funds. Based on net asset value, the leaders in this category include the likes of Sundaram Rural and Consumption Funds, Aditya Birla Genext, and Tata India Consumer, among others.

So my question is, What is the right way to invest?

First, decide what you want? What are your goals? Like buying a car, home, abroad, or retirement. Then decide what type of investment you need and what suits you. Say you want to go on a foreign trip after five years. What is the cost today? with inflation ( around 10% for all costs), what will it be in 5 years. Choose the equity if ‘it suits you’ ( How to know that is a big subject. Talk with the financial advisor if possible.