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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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The stock market volatility in the last couple of months has increased the anxiety level of many investors. While the ideal way to handle this kind of volatility is by taking no action, different kinds of investors react differently. In other words, while some of the investors feel compelled to sell, others see it as an opportunity to invest at reasonably decent levels.

Irrespective of the manner in which investors handle volatility, there are certain concerns that weigh on their minds. Let us analyse some of these and discuss as to how these need to be tackled.

Bear market or correction?

The recent happenings in the stock market triggered a debate over the question, " Are we at the start of a bear market or it is major correction caused by World events than market fundamentals?" Investors have been getting different opinions from the experts and that has heightened the confusion and fear in their mind. The consensus seems to be that we remain in a bull market and the recent downturn was indeed a correction. At the same time, going forward the markets will remain volatile. (Also read - Align your portfolio to your needs; not market needs)

Another point of debate has the reasons for this sharp correction. First of all we need to understand that this correction has been in conjunction with the international markets. It would not be wrong to say that in this bout of global profit booking, Indian markets being one of the best performers became quite vulnerable. Besides, the rising interest rates, hike in crude oil prices as well as weakening of Indian Rupee added to the woes of the stock markets.

While it is quite natural to get concerned about one's hard earned money, it is important for an equity investor to remember that volatility in the stock market is a natural phenomenon. As mentioned earlier, it is always easier for a long-term investor to handle volatility compared to a short-term investor who may find it difficult to cope with.

In the last one-month or so, significant part of my short term profits has disappeared

Volatile markets often make us emotional about our investments and jittery about short-term losses. No doubt, in the last one-month or so, most equity funds have suffered on account of steep fall in the NAVs. The average fall in the NAV of equity funds has been to the tune of around 40% on one-year basis. But, let's not forget, we are looking at short-term performance of an instrument in which we need to remain invested for at least three years to get the best out of it. That's why, it is often said that the longer one remains invested, the less is the impact of volatility. (Also read - Growth or Dividend - How to make the right choice?)

With the markets turning volatile every now and then, how will I make money in the long-term?

As mentioned earlier, volatility in the stock markets is a natural phenomenon. More often than not, markets remain volatile over the shorter term and in the long term they generally go up. There are strategies to turn volatility to one's advantage. One such strategy is to invest systematically over a period of time. By following a disciplined approach, one invests at different level of markets instead of timing the market. This in a way ensures that the average cost is lower than the average NAV and that ensures the growth over the longer term.

Some of the funds in my portfolio have fallen more than the others. What should I do?

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