Siddharth Pardesi and Vinay Joseph
Volatility has returned to financial markets in 2022. Indian equities have recovered some of the losses suffered during the 15 percent peak to trough drop from October 2021 to early March 2022, but equity markets are still down about 8 percent from their all-time highs. Indian bond yields have continued to inch higher, with the benchmark 10-year IGB yield crossing 7 percent for the first time since June 2019, as central banks turn hawkish amid rising inflation. It is important to remember that bond yields are inversely related to bond prices, implying muted or low bond returns in the current environment. On the other hand, INR gold has risen by about 8 percent demonstrating its safe-haven credentials.
Investing is never easy, especially during uncertain times as decisions can easily be affected by hindsight bias or fear of losses. The five-step guidelines given below could help investors looking to navigate volatile markets.
Take advantage of the volatility through rupee-cost averaging: In uncertain markets, a rupee-cost averaging strategy, spreading investments across different periods, can be an effective way to deploy money while mitigating the fear of investing at the wrong time. To quantify the benefits of rupee-cost averaging strategies, we compared a simple buy-and-hold strategy with time-based (quarterly rebalancing) and drawdown-based (every time market corrects 10%) strategies over the last 5 years for a balanced 60% equity and 40% bond portfolio. Our study found that drawdown-based strategy followed by time-based strategy not only gave higher returns but also saw lower volatility as compared to a simple buy-and-hold strategy.
Be wary of COMO: In bullish markets, investors rue missing out on a popular trend, creating a sense of FOMO (Fear Of Missing Out), making them chase that trend that could end in possibly disastrous results. The reverse happens in the times of volatile markets, with investors facing a significant COMO (Cost of Missing Out) by not being invested, given volatility and uncertainty. A simple analysis of Nifty Index over the last 20 years, shows that: (i) staying invested in equities would have given an investor 1080% return (11.7% annualised), (ii) missing 10 of the best trading days, investor returns would have dropped to 434% (7.8% annualised) and (iii) missing 30 of the best trading days, investor returns would be only 82% (a paltry 2.7% annualised). Further, the best trading days usually coincide or follow the worst trading days, making it impossible to time the market. Having an investment strategy and maintaining the discipline to stick to it, could go a long way to prevent one from succumbing to COMO.
Take into account the evolving macro environment: As investors, we tend to put a disproportionate focus on the microenvironment, overlooking the importance of the changing macro environment which has a large impact on our investments. Volatility in markets is usually triggered by changes in the macro environment with history showing most equity market drawdowns (Index fall of 10% or more) occurring around changes in key macro-economic variables. In addition, a changing policy environment either on fiscal or monetary side can help in identifying new investment themes and multi-year structural trends.
Keep your return expectations modest: Indian markets have shifted to ‘mid-cycle’ as faster policy normalisation by the US Fed and the RBI’s decidedly hawkish pivot lately drives bond yields and interest rates higher. History suggests, volatility rises during mid-cycle period, with equity returns being more modest during this phase and mirroring earnings growth. This is not unusual and is characteristic of a ‘mid-cycle’ environment for equities after the recessionary bounce.
Invest in a diversified portfolio: Remaining invested in a diversified portfolio is critical for investors to tide volatile markets. Diversification could be done through three broad ways – (i) Allocating among different assets classes like equity, bonds, commodities, cash, real estate, alternates based on one’s asset allocation and risk profile, (ii) Allocating to international markets to avoid single-market bias and (iii) spreading your investments within an asset class, for example spreading your equity investments across different market segments and style and similarly distributing one’s bond exposure based on duration, credit and interest-rate sensitivity. The basic premise for diversification is to have low correlation among the different assets, so that weakness in a particular asset can be offset by another asset.
Siddharth Pardesi is executive director, head - investment strategy, wealth sales & managed investments and Vinay Joseph is director, head – investment products and strategy, Standard Chartered Wealth, India.
Views are personal and do not represent the stand of this publication.
Discover the latest Business News, Sensex, and Nifty updates. Obtain Personal Finance insights, tax queries, and expert opinions on Moneycontrol or download the Moneycontrol App to stay updated!
