In the run up to the historic Parliamentary elections in 2014, the stock markets in India scaled new heights in anticipation of economic reforms and hopes of a better business environment. However, in the last five months, the bourses have become jittery and have witnessed tremendous volatility owing to a host of factors ranging from perceived delays in reform to key bills facing challenges in passage in the Parliament.
In such an environment, how should stock market investors react and what approach should they take? How does one make sense of varying opinion on media and internet in order to build an optimum investment portfolio?
Here are some investing principles an investor should consider in a volatile market.
Select stable and blue chip stocks: In volatile markets, stock prices fluctuate widely, beguiling even the shrewdest of investors. In such a scenario, investors should go for blue chip stocks that have been giving consistent returns over time. In a volatile market, large cap blue chip stocks are the most stable.
Moreover, since these stocks are expensive for most of the time, a volatile market offers an opportunity to buy them at reasonable prices. Use this opportunity to lap up good stocks that you had always wanted to but could not afford. A reasonable entry point would be when the stock price hits its 52-week low.
Explore mutual funds if direct equity investment sounds risky: If investing in stocks directly is not your cup of tea because of risk and fluctuations in the market, take the mutual fund route. Mutual funds invest in a set of assets and the returns depend on the weighted average return of all the assets under the fund. There are equity mutual funds which invest in a set of equities. The risk is lower in mutual funds because your return doesn’t depend on a few stocks only but on a wellchosen set of stocks. If you are not comfortable putting all your investment in stocks (even through mutual fund), you can choose balanced fund for investment, which invest partly in equity and partly in debt.
SIP is a time-tested way of entering the stock market through mutual funds. In a SIP, investors invest a certain amount every month in their chosen mutual fund
Use SIP route to mutual fund investing: SIP (Systematic Investment Plan) is a timetested way of entering the stock market through mutual funds. In a SIP, investors invest a certain amount every month in their chosen mutual fund. A regular monthly investment averages the price of fund over time, thereby resulting in costeffective purchases. So, when the prices fall, your monthly investment can buy more units; when the prices rise, your investment gets better returns.
Wait out the storm by investing in safer funds: Many investors are not comfortable with volatility and prefer to wait out the market mayhem. Yet, they may not want to get locked down with low-yield fixed deposits in case they need to invest after a few months if the market shows an uptrend. Debt funds are a better and safer option for investors who want to wait and earn returns at the same time.
Avoid intra-day trading if you are in it for the long run: During volatile phases, many investors tend to become day traders because of the fluctuation in prices. Although one can profit from this in a few cases, in most cases intra-day traders end up losing their investments. Speculative intra-day trading is to be avoided if the goal is investment for future. If intra-day trading still proves to be alluring, earmark a small amount (say 5-10% of your investment) for this and ensure you don’t cross this self-imposed limit.
Important Points For Investors
Short term market reactions are a reality that all investors should get comfortable with. Markets always react to news, industry grapevine, quarterly results, sovereign ratings, IIP numbers, crude oil movements, and many more factors. However, the general direction of the economy is what decides the stock market returns over the long run.
India is slowly getting its act together on the economic front. Many agencies have predicted that India is set to become the fastest growing economy if the current Government fulfils its promises. The current Government does look serious on the economic front, lending a good tint to the long term Indian story. In a year or two, India is slated to grow at 7%; at a higher clip in subsequent years, if the Government and other agencies are to be believed. When an economy grows at this pace, stock markets create wealth for investors who have been patient and remained invested. Investing one’s hard-earned money in different assets depends entirely on one’s risk profile and investment horizon. Equities or equity mutual funds are to be opted for only when the investment horizon is five years or beyond. This can help build long-term wealth in a relatively low risk manner.