US elections, Middle-east crisis, RBI policy: How retail investors can navigate turbulent times

Beware of global and domestic uncertainties, tread carefully to ride the market turbulence

As we transition into 2025 and beyond, retail investors must focus on strategies that enable them to thrive amid global challenges. While the Indian stock market has generated substantial returns for investors over the past two to three years, many have become overconfident, which is concerning. It's crucial not to completely overlook the role of luck and the market’s ability to absorb bad news.

This current bull run is liquidity-driven, and many stocks are being driven by euphoria, often discounting fundamentals or assigning excessive value in advance. Given the changing global landscape—such as the US election, the ongoing Middle East war and the Ukraine-Russia conflict—it’s time to exercise caution.

I remain bullish on India, but it's vital to watch your expectations. India’s long-term narrative remains robust. However, while the long-term outlook remains positive, it's essential to approach the short term with caution and leverage it to your advantage.

The current landscape

The global economic environment is intricate, influenced by geopolitical tensions, inflation and changing monetary policies. Retail investors should be mindful of the following critical factors:

FII outflows: Foreign institutional investors (FIIs) sold Rs 88,818 crore in October, opting for cheaper markets like China and Japan. This trend raises concerns about capital flight from Indian equities.

Valuation concerns: As of October 28, 2024, the trailing 12-month price-to-earnings (P/E) ratios for the BSE Sensex and Nifty50 stood at 24.1x and 23.7x, respectively. Although India’s long-term narrative is compelling, and earnings will catch up with valuations, investors must be cautious in selecting the right sectors, as past winners may not repeat their performance.

Corporate earnings: The season of festivals including Diwali may enhance sentiment in specific sectors, but overall earnings must deliver to support current valuations.

Geopolitical tensions: Ongoing conflicts in the Middle East and Eastern Europe underscore the market’s resilience. However, markets can react unpredictably to global events, making vigilance essential.

Inflation and monetary policy: Persistent inflation and potential interest rate adjustments will significantly influence market dynamics. Understanding these factors is crucial for making informed investment decisions.

Impact of the US elections: The election to decide the next American president carries substantial implications for India. Going by the statements made during their campaigns, a victory for Republican candidate Donald Trump may lead to increased tariffs affecting Indian exports, while a win for Democratic candidate Kamala Harris could enhance trade relations and strengthen defence partnerships, impacting the stock market, albeit for a short while.

Startup IPOs: The landscape for startup initial public offerings (IPOs) in India is evolving, with companies like Swiggy and OYO preparing for market debuts. While high-profile listings can be exciting, investors should remain discerning. Past experiences—such as the Paytm IPO, the 2008 Reliance Power IPO, and the latest Ola Electric IPO—serve as reminders that not all high-value IPOs guarantee success, so proceed with caution.

Also read: Israel-Iran crisis: Avoid knee-jerk reaction, use correction to deploy cash into equities

Seizing opportunities amidst challenges

Despite these hurdles, retail investors can seize opportunities by refining their investment strategies. Diversification is paramount. Take a moment to evaluate the percentage of your portfolio allocated to equities and how it aligns with your long-term financial goals. Why worry about market noise when you wouldn’t obsess over daily fluctuations in your real estate investments?

Caution with undue influence

Consider whether the people giving advice are genuine experts or simply making Insta reels to stir up hype. It’s astonishing how many offers guidance on health, parenting, and investing without real-life experience. Can you really trust someone who isn’t married to advise on a strong marital relationship, or those who haven’t raised a child to share parenting wisdom? Just as you wouldn’t rely on a correspondence course to learn swimming, you shouldn’t rely on shallow advice in matters that deeply impact your life. Follow true experts, not those just selling courses to make money.

Many influencers advocate renting everything—from cars to homes—while making those reels/broadcasting from their own cars or living rooms. Remember, personal finance is exactly that: personal. You need a customized financial plan, not a one-size-fits-all approach. While a standard plan might be fine for someone in their 20s, it’s essential to tailor your approach to your unique circumstances and goals as you move forward.

Also read: SEBI lists out seven steps to regulate finfluencers and keep investors' trust

Focus on what you can control: Whether you're in your 30s, 40s or 50s, take a look at how your savings are allocated—how much is in equity versus assets like real estate, gold or fixed deposits? If most of your savings are outside the stock market, does it really make sense to worry about daily market ups and downs?

Instead, think about gradually increasing your equity exposure through mutual funds if managing stocks directly requires more time and expertise than you can commit. But don’t let short-term fluctuations distract you. Focus on your primary income—your job or business—and clarify your approach: Are you investing or speculating?

Investment amount: Determine how much you plan to invest and its significance relative to your overall net worth. If your equity allocation is low, consider gradually deploying funds through mutual funds via systematic transfer plans.

Diversification and asset allocation: Ensure your portfolio is well-diversified. Focus on different asset classes to minimise risk—this is the only way to maintain a sound portfolio.

Mutual funds strategy: Direct a portion of your investments toward equity mutual funds to tap into growth potential. Systematic Investment Plans (SIPs) offer the advantage of rupee cost averaging, particularly valuable in a fluctuating market. You can also use a Systematic Transfer Plan (STP) to gradually deploy funds, but remember that market corrections present valuable opportunities. Staying agile and ready to invest during market dips—not just following a standard STP plan—can set apart an astute investor. While timing the market isn’t possible, strategic investments during major corrections can enhance returns.

For the long term, consider options like multi-cap, flexi-cap, or mid-cap funds, which offer a higher risk-reward profile compared to large-cap, index, and balanced advantage funds. Select funds based on your risk tolerance and maintain a balanced asset allocation to ensure your investments align with your financial goals. Make informed choices to maximize your portfolio’s potential.