What retail investors should do in volatile markets?

Historical data suggests that whenever such a sell-off in equity has happened, markets have delivered positive returns in the next 15 to 18 month time.

Post a stellar 29% returns in 2017, Nifty rallied in 2018 on the back of strong macroeconomic data, two back to back normal monsoon, successful implementation of GST etc. and touched to new lifetime high of 11,760 in August.

However, September month started with sign of correction with intensifying trade war between the two giant economies US and China, the correction escalated further in October month on worries of rising crude price to the upwards of $85/bbl and falling Rupee at an all-time historical low of 74.40 (depreciating 17% in 2018) both these played a spoilsport denting to the equations of India’s twin deficits (fiscal and current account deficits), Nifty eroded entire gains it made in 2018 in just one month.

Global scenario is also showing negative trend as the trade war is widening to Russia and Iran, US FED hiked rates 3 times in this year and the US bond yield rose to 3.20% and its economic growth is firing from all cylinders which triggered FIIs redemption from Indian equity and bond markets. So far, FIIs pulled out Rs 43,000 crore in 2018 from Indian equity markets (first time in last 8 years ) and redeemed Rs 58,000 crore from the debt market securities.

Fundamentally, everything is in place as India’s GDP expected to grow 7.5%, Industrial production data suggests growth, lower inflation, lower interest rates, GST average monthly collection at Rs 95,000 crore, rising direct tax collection, 15-18% growth in corporate earnings etc.

Historical data suggests that whenever such a sell-off in equity has happened, markets have delivered positive returns in the next 15 to 18 month time.

We have the examples from 2008 when Lehman crisis spooked the world markets, European Debt crisis in 2011, China slowdown and Yuan devaluation in 2015 and US Elections and demonetisation in 2016, in all these events, markets reacted negatively and gradually recovered post the analysis of the impact of the very same events.  

In this correction, market is again providing an opportunity for the investors to add or enter into the equity route investment keeping few rules in the mind.

Rule 1: When markets turn volatile, never take knee-jerk reactions and don’t give into speculations. Don’t do anything irrational. You should always evaluate why a stock is getting beaten down before taking a decision to exit it.

Rule 2: Evaluate the stocks in your portfolio that why you invested in a particular stock and its fundamentals.

If you are not completely sure of why you invested in a stock, then you should exit.

Rule 3: Don’t stop your SIPs and don’t change your financial plan because a bearish phase is precisely the time when sticking to the SIPs will help you achieve your long-term goals. By stopping the SIP, you will miss out on the compounding benefit of equities. You will be buying more units at lower prices and reap benefits when the markets go higher in the future.

Rule 4: Don’t just bottom fish or value pick stocks because they are available at really low levels. It is not always the case that a stock that available at a low level will end up being a value buy, it could end up being a value trap.

Rule 5: Always diversify, do not put all your eggs in one basket. The correction may have made stocks of a particular sector available at really cheap prices. But it does not mean you should buy stocks of just that one sector.

Look for stocks where there is a visibility of earnings growth, stable management, strong pricing power or market presence, and can benefit from the fiscal expansion. At the same time, too much diversification is also not good. Some investors may try to reduce the risk by spreading their money across several sectors or even multiple companies within a sector at once.

Don’t take leveraged bets, margin investing and leverage can yield high returns, but also lead to big losses. This vers ion of investing should be avoided and particularly when markets are volatile.

(The writer is Vice President- Retail Research at Motilal Oswal Financial Services Ltd. )

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What retail investors should do in volatile markets?

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