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How to win in a volatile market
Arnav Pandya in New Delhi | March 03, 2008
The large jumps and falls are common, not only in the equity markets, but also other asset classes. During such times, many investors start looking for stable avenues to park their funds. It is important that adequate research is done, before deploying your funds to any particular instrument.
Investor Profile: Risk-Averse
For one, look for an instrument that provides stability. To achieve this, look at options that match your needs. There are several options available that can help you to fulfil the target. Then, look for a product that does not fluctuate too much, in terms of the value of investment. This helps a person, who is completely averse to any kind of loss.
A combination of these two factors would mean looking at options like deposits (with banks and institutions) and bonds (high credit rating) and others that are not traded actively in any stock exchange. Such instruments do not witness fluctuations.
Though the returns on such instruments are much lower than getting into equities or mutual funds, the fact that they are low-risk makes them very useful, especially for the risk-verse individual.
Then there are several investors who would want some stability in their finances so that, while they are aspiring to achieve their investment goals, there is no additional pressure of volatility on them.
Such people are not very averse to a position where for a temporary period of time there is a fall in the value of their investment or where there is some reduction in the investment value at a certain stage but at the end of the day this has to be covered up and returns earned.
This is far easier to tackle because there are various routes available through which investors can ensure that they are able to present themselves with some returns at the end of the day.
This is the area where options like fixed maturity plans will be acceptable where the investor will earn some returns when they hold the instrument till the time of maturity. Several other debt instruments can also fit the requirement which includes the debt instruments that are traded in the market and have low default risk.
Investor Profile: Some Risk, Low Volatility
There are some investors who are ready to take some risk, if they are likely to get higher returns from their investment. This class is willing to bear some amount of volatility but a low level of that.
To create a portfolio for such an investor, the proportion of equity has to be low. Also, within equities, there will be companies that have a lower volatility in their price movement.
In other words, in stock market parlance, the stocks in this person's will be those which have a low beta portfolio (Beta is referred to as the movement of stock as compared movement of Sensex or Nifty.
A low beta would, therefore, mean that the stock is not strongly co-related with the movement in the underlying index). Of course, sometimes a sharp upwards or downwards movement can impact such stocks, but the portfolio has to be structured in a way that the overall impact is negligible.
Investor Profile: Indecisive
There are times when a person is not able to decide what he wants and hence, they keep shifting their position. These people might want to take some risk when the market is doing rather well.
However, they get completely spooked in a downslide and then, want to get out of the market completely. For such people, there should always be a part of the portfolio in liquid cash.
This will help them to divert to a specific area, when required. Also, they can exit whenever they wish to. The funds can be moved to some other area, but all this action will come at a transaction cost. So the rate of returns may fall.
In other words, there are different ways to tackle volatility by different profiles on investors. Follow a portfolio approach rather than individual investment decision for best results.
The writer is a certified financial planner.