Jun 04, 2012 10:32 PM IST | Source: personalfn.com

Are you well equipped to beat the stock market volatility?

Everything in this world is not linear (meaning in a particular direction only without twists and turns). Even in our day to day lives we have ups and downs. Some days of the week you feel contended, there is minimal stress, your boss or colleagues treat you well and you feel proud.

Are you well equipped to beat the stock market volatility?

Everything in this world is not linear (meaning in a particular direction only without twists and turns). Even in our day to day lives we have ups and downs. Some days of the week you feel contended, there is minimal stress, your boss or colleagues treat you well and you feel proud. Then there are those days when you feel low, left out or ignored, work pressure along with family pressure; things just don’t go your way. Such is life, it is non-linear; it gives you joy, happiness but not without some doses of sorrow, unhappiness, etc. But, interestingly this non-linearity adds the much needed spice to our lives. Imagine a life which has only happiness, you might just get bored; or a life only and only full of sorrows, shear case of a nervous breakdown. Thus, this non-linearity gives us the much needed balance in our lives. The bad times make us tougher as life teaches us certain lessons through the experiences we take and the good times make us value the human life.

Just as our lives are non-linear the stock market or the equity market too is non-linear. Meaning, it does not move only in one direction. When the investor sentiments are upbeat, there is liquidity galore, consumption is strong, economy growth is robust; the stock markets depict a northward journey. But on the other hand, when the investor sentiments are over-casted with pessimism, liquidity is crunched, consumption theme is dampened, economic growth is dwindling; the stock market loses its ground and starts slipping down. This is what the market gurus’ mean by volatile stock markets. But this characteristic of the stock market should not be a deterrent for you to invest in equity.

Rollercoaster ride of Indian Stock Market

 

 

 


 

 

 

 

 

 

 

 

 

 

(Source: ACE MF, PersonalFN Research)
Instead you should smartly make use of this volatility to your advantage by keeping in mind the below mentioned points:

1. Investment time horizon:
Investing is all together a different ball game than trading. Remember a trader is good only till his last trade. Investing with a long term horizon of say at least 3 to 5 years is essential to reap the benefits of equity as an asset class. Though volatility is a characteristic of the equity markets, over the long term equity as an asset class can help build wealth and aid in achieving your long term goals.
And if you lack the aptitude to directly invest in equity markets then you need to adopt the mutual fund route to equity markets. Here, investing in diversified mutual funds from fund houses following prudent investment processes and systems with a long term point of view becomes imperative and do well to your investment portfolio. However, in order to have winning mutual fund schemes in your portfolio, you need to have a prudent approach.

2. Always stay diversified
When markets are on the rise and everything appears hunky dory that is the time when many of you investors are prone to make mistakes. That is the time when various high risk investments like thematic/sector funds are spawned. Since a rising tide lifts all boats, most fund houses are quick to respond to a rally by launching high risk investments like thematic funds which they otherwise would not have launched. Taking on higher risk pays rich dividends in a rising market, which explains why investors are prepared to risk their monies in a thematic fund, which they otherwise would not have done. Don’t believe us? Compare the number of investors who invested in technology/software funds in 1999-2000 (before the tech crash) with those who invested in them in 2000-2002 (after the crash). Once the tech crash had set in, technology funds were the most reviled investments. On the other hand, investors who were invested in well-diversified equity mutual funds were relatively better-off to face the market volatility.

3. Balanced funds to balance your portfolio
The “balanced funds” category in mutual funds entails in them a benefit by providing you an effective asset allocation, while you are invested in a single avenue of investment. They invest in across equity and debt markets (minimum 65% allocation towards equity), which leaves them well placed to serve three objectives:

  • Shift across asset classes based on the best available investment opportunities
  • Use the debt component intelligently to de-risk the equity portfolio during volatility in equity markets
  • Book profits in equities regularly which again de-risks the equity portfolio by capping the level.

Like balanced funds, monthly income plans (MIPs) too offer a similar investment proposition, although to a lesser extent. Since MIPs usually invest 15%-25% of assets in equities they are suited for investors with low-to-medium risk appetite.

In a falling market, when being fully invested in equities can prove perilous, a balanced fund with a 35% debt component might just be the apt saviour.

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4. Investing through SIPs
Systematic Investment Plan - SIP (a mode of investing in mutual funds) has been widely adopted by investors. The reasons are not far to seek. Investing Rs 500 – Rs 1,000 every month is a lot easier on the wallet than investing (a minimum of) Rs 5,000 lump sum. By investing smaller amounts at regular intervals, you can reduce the average cost of your mutual fund investments over a market cycle. This is possible because when markets are volatile, SIPs activated during that period lower the overall average cost of purchase. So, as investors if you opted for a SIP route of investing during volatility times of the Indian equity markets can manage the shudders well.

Moreover, enrolling for SIPs can also infuse in you a long-term investment habit due to very nature of SIPs i.e. investing money at regular intervals (monthly, weekly or quarterly).

5. Gold, your hedge against inflation
As investors’ you ought to have the precious yellow metal in your portfolio (say at least 5% - 10% of your total investible amount), for the trait it being a safe haven during turbulent times. Also, a noteworthy point is that the inverse relationship of gold with equity as an asset class makes a strong case for inclusion in your portfolio. But you got to adopt caution and invest in gold the smart way, by opting for gold ETFs instead of physical gold investments, due to the following benefit offered by them:

  • Holding cost: Yes, we often don’t evaluate that holding gold in a physical form, comes at a “holding cost”. Holding cost refers to the cost of holding a security. Hence, the locker rent which one pays for stacking gold in the bank locker constitutes to be the holding cost.
  • Quality: Unless the gold which you buy is from a reliable source, the quality of the same is always under question, thus resulting in your precious asset losing its true value.
  • Premium: Very often jewellers and banks sell gold coins and bars at a premium, to the market price. The premium is usually in the range of 5% - 10% (inclusive of making charges) in case of jewellers and upto 15% in case of banks. So, in that sense the pricing of gold varies depending on the vendor.
  • Resale Value: While selling your physical gold, you must have encountered some horrendous experiences of your gold merchant telling you “this is not 100% pure – it has some mixing”, thus questioning the quality of the gold held by you. Moreover, if the quality of the gold held by you, is of the finest purity, then while converting gold into jewellery making charges are deducted. And, as regards the banks are concerned they will refuse to buy-back your gold.
  • Tax: If you are gold bug, then you would also be axed by wealth tax.
    Thus it important to note that although volatility will always be an integral part of the equity markets, it is your approach to handle turbulent times which can help you to manage the volatility well. Having a calm and prudent approach to investing, will only help you on the path to wealth creation.

PersonalFN is a Mumbai based Financial Planning and Mutual Fund Research Firm.

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