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Fickle markets: 7 FAQs answered
Hemant Rustagi, Moneycontrol.com | January 11, 2007
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.
1. 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.
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.
2. 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 per cent 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.
3. 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.
4. Some of the funds in my portfolio have fallen more than the others. What should I do?
A mutual fund portfolio may have a mix of diversified, mid-cap, small cap, specialty as well as sector funds. Different types of funds react differently in a rising as well as falling market. For example, generally a mid-cap fund falls more than a large cap fund in a falling market.
Investors who follow a haphazard approach to investing may end up owning funds that may fall more than the average. For example following a strategy whereby one invests only in New Fund Offerings, or in funds that are the flavour of the month and those that are about to declare the dividend is more likely to create a situation like this.
Therefore, for someone who wishes to be a successful long-term investor, it is imperative to design a well-balanced portfolio. It is equally important to understand the likely impact on the performance in case the market turns bearish or volatile.
5. When I book profits, the market continues to go up and when I don't, it falls
This is a situation, which investors face many a times. Actually, this happens when one tries to time the market. It is a well-known fact that even the most experienced fund manager finds it difficult to time the market successfully on a consistent basis. No wonder, when a common investor tries to do this, he invariably finds the market moving in the opposite direction.
While it is a fact that even a long-term investor needs to book profits, the key to success is to have a proper strategy in place. One such strategy is to rebalance the portfolio periodically. Rebalancing is a method by which the allocation to debt and equity are brought back to the original level.
This is necessary as one asset class grows faster than another. Rebalancing becomes necessary because we make investments to achieve best results at an acceptable level of risk. By doing nothing, we violate this premise and get exposed to unacceptable level of risk.
6. Even the NAVs of the funds that I bought at par have fallen
For many investors who have been investing in the NFOs thinking that buying at par would provide them safety from downside, the below par NAVs came as a shock. It is not that the NAVs of the existing funds have not fallen but to invest only in NFOs as a strategy to get protection from volatility is completely wrong.
When one invests in existing schemes after a through research, the chance of achieving investment objectives over a varying period of time improves considerably. The objective here is not say that one should not invest in NFOs at all. If the NFO fills the gap in one's portfolio then it makes sense to invest in it, otherwise one is better off investing in existing funds.
There is a section of investors who has been investing in NFOs because it is believed that buying at Rs 10 is cheaper than buying at Rs 50. This is completely unfounded. It is a proven fact that the return from a fund depends on the quality of the portfolio, its composition as well as investment strategy of the fund manager. In other words, the price at which one invests has no impact on the prospects of the returns from that fund at all.
7. Where do we go from here?
Obviously, the question on everyone's mind is what are the prospects of stock market in near as well as long term. Considering that the recent fall was mainly on account of profit booking as well as some other international factors, it would not be wrong to say that fundamentally nothing has changed as far the 'Indian Story' is concerned.
The economy continues to grow at a healthy rate and the corporate sector is expected to continue its good show. While there are definitely concerns about the rising interest cost, the strong domestic demand should help the corporate sector in facing this challenge.
For a long-term investor, equity funds remain potentially the most rewarding investment vehicle. All one needs to do is to select good quality funds and take a long-term approach. Needless to say, the volatility in the short term should be ignored and the best way to do so is by remaining focused on the long-term investment objectives.
The author is CEO, Wiseinvest Advisors Pvt. Ltd. He can be reached at firstname.lastname@example.org
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