Expert advice

Aug 13, 2013,20.28 IST

A 5-point strategy to tackle challenging market conditions

Vicky Mehta
Morningstar India

Challenging market conditions are testing the resolve of investors. We present a checklist of dos and don’ts to help investors ride out the present environment.

To say that these are testing times for investors would be stating the obvious. On a year-to-date basis, equity markets have been at their volatile best. In the recent past, the central bank’s attempts to bolster the rupee have ended up spooking debt markets.

And to further worsen matters, the long-favoured bastion of investors – gold, has lost some of its sheen.

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We present a 5-point checklist of dos and don’ts to help investors ride out the seemingly-dire environment.

1. Don’t panic

To begin with, it will certainly help investors’ cause to not hit the panic button and make knee-jerk investment decisions. Dealing with volatility and uncertainty are integral aspects of market-linked investing.

This is neither the first occasion that investors have been faced with a challenging environment, nor will it be the last. Investors must accept that market-linked investments entail taking on both--the risk of uncertain returns and losing the capital invested.

For instance, debt funds haven’t suddenly become risky avenues as is being widely perceived; market conditions have simply brought to the fore risks that have always existed.

Then again, market-linked investments also have the potential to deliver lucrative returns. And at present, that clichéd adage about opportunity presenting itself in times of adversity is about as relevant as it can be.

The present market environment has thrown up opportunities to invest in several avenues at attractive prices. If you are a long-term investor, you should be busy evaluating investment opportunities rather than panicking.

2. Don’t discontinue SIPs

A systematic investment plan (or SIP as it is commonly referred to) will deliver at its best in volatile markets. With every dip in equity markets, the SIP installment garners more units for the investor. This in turn lowers the average cost of purchase.

Conversely, lump sum investing scores over the SIP route when markets rise secularly. If you are convinced about the long-term potential of the fund you are invested in, you should refrain from discontinuing an ongoing SIP. 

If debt funds are your calling, it may not be a bad time to stay put on the shorter end of the yield curve. For instance, you can consider parking monies in liquid funds, ultra-short bond funds and short-term bond funds until more clarity emerges on where interest rates are headed.

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3. Evaluate your investments objectively

Investors would do well to evaluate their investments objectively and not read too much into short-term performances. For instance, if you are invested in a diversified equity fund, then you should typically have an investment horizon of at least five years. Reading too much into what has happened in the last quarter or even year, and acting on it is fraught with risks.

Another aspect to consider is, whether the fund’s performance is out of character, given the manager’s investment style. For instance, consider a fund wherein the manager plies an aggressive investment process or one wherein the manager has a long-term horizon and doesn’t mind enduring short-term pain—such funds struggling in the present environment wouldn’t be surprising. Conversely, a conservatively-run fund’s inability to perform better at limiting downside risk versus its more aggressively-run peers perhaps merits investigation.

4. Be pragmatic while selling

The decision to sell is no less significant than the decision to buy. You may have to sell a stock or fund for a variety of reasons such as—you realize it isn’t apt for you or it undergoes a change in fundamentals or it simply fails to live up to expectations. However, selling an investment in the midst of a downturn can be rather challenging since it involves the possibility of incurring a loss.

There is no standard solution to this problem. Broadly speaking, if liquidity is not a constraint and you are willing to wait out until you can at least recover the sum invested, then you should do so. Conversely, if liquidity is a constraint and the downturn has thrown up a lucrative opportunity, it may make sense to sell some of the least-compelling parts of your portfolio to fund the purchase.   

5. Now is the time to introspect

An upside of a downturn is that it provides the opportunity to introspect. In soaring markets when there is euphoria all-around, investors tend to feel confident and take on higher risk than usual. However, a downturn like the present one, offers an excellent opportunity to candidly assess one’s risk-taking ability, investment horizon and even the portfolio.

For instance, ask yourself if you are yet comfortable being invested in the illiquid small-cap stock in your portfolio? If your portfolio is tilted in favour of gold, with little or no allocation to other asset classes, do you yet believe that it is equipped to help you achieve your long-term goals?

Answering such questions will give you a better insight into your investment psyche. Not only can such introspection help you suitably rejig the portfolio, it will also pave the way for making apt investments, going forward.

The author is a senior research analyst with Morningstar India.

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