The 2020-2024 rally in the Indian stock markets has officially surpassed the 2003-2008 bull run, and stands as one of the longest rallies in recent history. But over the last 3-4 months, the market has fallen over 10-15% across different market caps and segments, and you may be wondering if the party's over. Will the markets fall further? Should you perhaps pull your money out before a bigger upcoming crash? Should you stop your SIPs until the market volatility subsides?

This is certainly a time to re-evaluate the risks in your investment portfolio. Market valuations - especially in the mid-cap, small-cap, and micro-cap segments are stretched. The Warren Buffet Indicator - the Market-cap to GDP ratio for India was recently as high as 150%, much higher than the fair valuation of 100%. The USD is strengthening against all currencies, and the Indian rupee is not immune to depreciation either. Meanwhile, corporate earnings and profits of the Nifty 50 companies in India are slowing down, and the Indian GDP estimates are getting revised downwards. Simultaneously, foreign institutional investors (FIIs) have pulled their money out of India, partially to invest in China - whose government recently announced a slew of measures and incentives to grow their economy that has slowed since 2020. Not to mention ongoing geo-political tensions, supply chain disruptions, and the ‘Trump’ factor coming to play from next week that may disrupt the established global trade order with the ‘America First’ philosophy. All this sounds scary and doesn’t seem very promising for good returns in 2025.

Having said the above, there is no reason to panic - if your goals are long term (10-20Y+), you have done goal-based investment planning, and you are sticking to your planned asset allocation. Why is that?

Despite these short-term challenges or ‘headwinds’, the long-term growth prospects of the Indian economy are still strong and ‘structurally intact.’ We have a once-in-a-lifetime demographic dividend, with millions of young people, working, earning, and spending on people, places, and things to improve their lives. This will keep the demand up for FMCG, automobiles, tourism, consumer durables, real estate, etc., benefitting organized players. Despite ongoing global challenges, India is currently the fastest growing major economy in the world and is expected to reach and remain the third largest economy, behind the US and China for the foreseeable future.

However, the long-term prospects of the economy, do not take away the short-term investment risks in the equity market, for reasons such as valuations and earnings mentioned earlier. This is why it is important to retain a longer-term perspective when it comes to investing in equities, and also why equities are better suited for longer-term financial goals. But simply doing a SIP and rupee-cost averaging for the long-term does not guarantee lower risk. This is why asset allocation and gradual reduction of equity exposure closer to the goal are important. Even a conservative hybrid fund with significant debt/bond allocation - when interest rates have peaked as they have now - may be able to give you better inflation-adjusted returns during such periods of sideways equity markets.

Equity markets are like ‘fire’ - capable of uncontrolled destruction - like the mishap in Los Angeles; but when used in a controlled system such as a gas stove - are capable of being a reliable energy source for daily cooking. Goal-based investment planning, with asset allocation as your sole compass for when and how much to sell, or buy, during periods of review and rebalancing - gives you a structure of a controlled system to derive the best benefit of equities, while minimising the risks.

In summary, keep your SIPs going, and don’t think of withdrawing - as long as you have done the above. Markets are cyclical and will not simply keep going up and only up. Volatility is a default feature of the market from which there is no escape. Without the pain of seeing your portfolio go down by multiples, you will never be able to see the orders-of-magnitude growth that will come in the future.