When markets turn volatile, investors tend to take hazy decisions. However, times like these are the best to analyse one's portfolio and start following "buy and hold" strategy to get the best from equity and equity oriented funds, reckons Hemant Rustagi.
The volatile stock market has been testing the resolve of investors for sometime now. The question on every equity fund investor"s mind is, "When will the stock market recover?" Considering the slow economic growth, government's inability to carryout big ticket reforms and widening fiscal deficit, the recovery may not happen any time soon.
Besides, the sliding rupee has been adding to the woes of investors, already reeling under the impact of the poor stock market performance on their portfolios. Even FIIs have been pulling out money for the fear of loss of value.
The rupee has lost more than 27% in value over the last one year. Factors such as falling capital inflows, rising fiscal deficit, high current account deficit and crisis in Greece have been responsible for a sinking rupee. Although the RBI has taken a few corrective measures, its unwillingness to take some bold steps to stem the fall in the rupee has been disappointing.
While export oriented companies benefit from the fall in rupee, the profitability of the companies that import raw material from abroad as well as those that have significant borrowings is adversely impacted. Needless to say, as the downslide in the value of rupee continues, equity investors are a worried lot.
Evidently, stock markets are likely to remain volatile for some more time. Therefore, investors will have to display maturity in tackling these gyrating markets. Hence, abandoning equity funds at this juncture would not be a wise decision. Here is how investors can tackle these turbulent times:
Continuity in investment process is the key
While the current market like situation can make even a most seasoned investor jittery, the key for a serious long-term investor would be to opt for continuity in the investment approach rather than adopting haphazard short term strategies.
While it is true that investors have had mixed experiences from their investments in equity funds even through SIP, a disciplined investment approach takes care of most of the imperfections in the market. It benefits investors partly because they abandon any strategy that might prompt them to time the market and partly because in the long run stock markets tend to perform better than other asset classes.
Remember, a falling or a volatile market provides a great opportunity to benefit from "averaging". That's why it is necessary to start the investment process with a clear time horizon in mind and remain committed to it.
Time to reassess the selection process
For those investors who have not been following the right selection process, it's time to have a close look at their portfolio to ensure that it has the right balance and the mix to give improved performance not only when the market recovers but also for many years to come.
While selecting an equity fund, it is important to keep the risk profile in mind and the mix of funds selected for the portfolio should reflect that. For an aggressive long term investor, the portfolio composition would be different from someone who may have different time horizon and risk profile. Similarly, before investing in a sector fund, one must ensure that one has the risk appetite required for such an investment and that existing funds in the portfolio do not have a substantial exposure to that sector. Besides, fund managers have different philosophies and styles. It is important to include funds with different styles to benefit from them.
Don't Compromise long-term growth for short term gains
It is quite common to see investors losing sight of their long-term goals when they spot an opportunity to make some short term gains. For example, in a current market like situation, it can be quite tempting to either pull money out of equity funds or stop the process of investing in them and redirect it to attractive debt options.
While it might look like a great investment decision, investors will still have reinvestment risk to tackle in future. A likely scenario of lower interest rates and improved indices levels might compel the same investors to re-enter the stock market at a higher level. Such strategies can make an adverse impact on the end result for a long-term investor.
Follow goals-based investing
In today's complex financial environment, goals-based investing can bring in fresh perspective in one's investment process. Not only it helps in mitigating irrational behavior caused by volatile economic climate but also reduces the volatility of most long-term investments. Besides, it helps in ensuring a balance between preservation of capital and pursuit of investment returns.
To develop an effective plan one must list out one's goals i.e. short term, medium term and long-term and assign a time horizon to each of these goals. Thereafter, one needs to quantify these goals so as to set a target that needs to be achieved over a pre-decided time horizon.
On the other hand, a tentative approach would compel an investor to analyze the situation afresh every year. Invariably, one would end up taking decisions that are driven by emotions and the current market moods rather than any logic. It's time to have a re-think on this and start following "buy and hold" strategy to get the best from equity and equity oriented funds.
The author is the CEO of Wiseinvest Advisors Pvt. Ltd. He can be reached at email@example.com