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Smart strategies for volatile markets

Published on Thu, Jan 11, 2007 at 12:16 | Source : Moneycontrol.com

Updated at Mon, Jan 22, 2007 at 22:23

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Some of the funds in my portfolio have fallen more than the others

A mutual fund portfolio may have a mix of diversified, mid-cap, small cap, specialty as well as sector funds. Different types of funds react differently in a rising as well as falling market. For example, generally a mid-cap fund falls more than a large cap fund in a falling market. Investors who follow a haphazard approach to investing may end up owning funds that may fall more than the average. For example following a strategy whereby one invests only in New Fund Offerings (NFO), or in funds that are the flavour of the month and those that are about to declare the dividend is more likely to create a situation like this.

Therefore, for someone who wishes to be a successful long-term investor, it is imperative to design a well-balanced portfolio. It is equally important to understand the likely impact on the performance in case the market turns bearish or volatile.

When I book profits, the market continues to go up and when I don't, it falls

This is a situation, which investors face many a times. Actually, this happens when one tries to time the market. It is a well-known fact that even the most experienced fund manager finds it difficult to time the market successfully on a consistent basis. No wonder, when a common investor tries to do this, he invariably finds the market moving in the opposite direction.

While it is a fact that even a long-term investor needs to book profits, the key to success is to have a proper strategy in place. One such strategy is to rebalance the portfolio periodically. Rebalancing is a method by which the allocation to debt and equity are brought back to the original level. This is necessary as one asset class grows faster than another. Rebalancing becomes necessary because we make investments to achieve best results at an acceptable level of risk. By doing nothing, we violate this premise and get exposed to unacceptable level of risk.

Even the NAVs of the funds that I bought at par have fallen

For many investors who have been investing in the NFOs thinking that buying at par would provide them safety from downside, the below par NAVs came as a shock. It is not that the NAVs of the existing funds have not fallen but to invest only in NFOs as a strategy to get protection from volatility is completely wrong. When one invests in existing schemes after a through research, the chance of achieving investment objectives over a varying period of time improves considerably. The objective here is not say that one should not invest in NFOs at all. If the NFO fills the gap in one's portfolio then it makes sense to invest in it, otherwise one is better off investing in existing funds.

There is a section of investors who has been investing in NFOs because it is believed that buying at Rs 10 is cheaper than buying at Rs 50. This is completely unfounded. It is a proven fact that the return from a fund depends on the quality of the portfolio, its composition as well as investment strategy of the fund manager. In other words, the price at which one invests has no impact on the prospects of the returns from that fund at all.

Where do we go from here?

Obviously, the question on everyone's mind is what are the prospects of stock market in near as well as long term. Considering that the recent fall was mainly on account of profit booking as well as some other international factors, it would not be wrong to say that fundamentally nothing has changed as far the 'Indian Story' is concerned. The economy continues to grow at a healthy rate and the corporate sector is expected to continue its good show. While there are definitely concerns about the rising interest cost, the strong domestic demand should help the corporate sector in facing this challenge.

For a long-term investor, equity funds remain potentially the most rewarding investment vehicle. All one needs to do is to select good quality funds and take a long-term approach. Needless to say, the volatility in the short term should be ignored and the best way to do so is by remaining focused on the long-term investment objectives.

- Hemant Rustagi

The author is CEO, Wiseinvest Advisors Pvt. Ltd. He can be reached at hemant.rustagi@moneycontrol.com

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