Pause before investing in a volatile market

The equity markets in India have seen a total roller coaster of a run over the last year. The market indices touched an all-time high in 2021, leading to an increasing number of new investors flooding the markets. Several reports concur that almost 1.5 crore new investors participated in the markets last year alone.

But underneath this bullish trend, which reached its zenith around December 21, many stocks traded above their intrinsic value, fuelling concerns about a potential market correction. Massive overvaluations of some recently listed companies whose IPOs failed to live up to the hype added to the turmoil. Further, the looming threat of the third wave of the pandemic contributed to a sense of apprehension, which is visible in the recent downswings in the markets.

The volatility witnessed in the market in the last year was quite exceptional. Amidst this frenzy, retail investors got caught off guard trying to navigate the choppy markets. If you, too, had a challenging time making the right investment decision in such market turbulence, you should assess your investment strategy and check if it still aligns with your goals. Here are some pertinent questions you can ask yourself.

Defining goals

Goal-based investing is the best course of action for retail investors striving to secure their financial future. Once the goals are clearly defined, it becomes easier to build a roadmap and invest in financial instruments that take you closer to your goals. The markets may look attractive, but before diving in to invest, you should consider if it aligns with your financial plan and goals.

Working out asset allocation

Asset allocation is a crucial step while managing personal finance. Optimum diversification of savings into various asset classes safeguards your investments from market ups and downs. Once you have arrived at the asset allocation that works for you, adhere to it. While the temptation to increase your equity exposure may be high, remember that if you do so, any correction in the markets may turn out to be a setback for your portfolio.

Chasing short-term returns

When the markets are at an all-time high, many investors take it as an opportunity to make quick gains in the short term. If you are considering short-term transactions in the market, do remember that the volatility at the moment is on the higher side. With many top stocks being overbought, short-term investors may find it hard to exit their positions at the right time which may be detrimental to your financial health.

Understanding stock markets

Equity is one of the best investment avenues to generate long-term inflation-beating returns and should be a part of every investment portfolio. However, if you are only just getting started investing in the equity markets, it may be difficult for you to identify relevant stocks and manage your funds as needed. If you feel you lack the requisite market know-how, then it would be prudent for you to approach the markets via the SIP route. When you invest small amounts consistently every month, it eliminates the need to time the markets. Due to rupee cost averaging, the overall cost of investments comes down, optimising your net returns. Investing with this approach also keeps your investment relatively unaffected by market cycles. This way, even if the market does correct itself over time, your portfolio will continue to benefit from the market movements.

Model portfolios are another route for investors with limited market knowledge. By selecting a readymade portfolio as per their risk appetite, the investor can leverage the markets without worrying about picking the stocks or rebalancing the portfolio.

Keeping a check on emotions

The internet had been replete with news of markets touching new peaks every other day. Stories of investors capitalising on this trend for gains and advice for retail investors to hop on the bandwagon were abundant. Similarly, with market uncertainties due to the current third wave, there is an equal amount of negative emotions circulating across social platforms. Easy access to the markets via various apps has made it possible to execute a trade with just a click of a few buttons. But before making a call, ensure that your emotions are in check and the decision is in your best interest. Take help from experts, if need be, for prudent advice.

The bottom line

Investment in equity markets should be backed by research and support your financial goals. Short-term market moments may sway your decisions, and the fear of missing out may be hard to curtail, but try not to lose sight of what matters in the long run.

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