Making the most when the market is uncertain

Equity markets like any other markets are dependent on various micro and macro-economic factors making it a volatile and risky instrument. While the company and sector-specific risks play a major role, different macro risks called economic factors to influence the markets as a whole and all companies as well. Any macro-economic change often leads to movement in the markets causing volatility in the market. Unemployment data, monetary policy and interest rate changes, industrial production data, agricultural output, exchange rates, commodity prices, monsoon forecast, etc. are some of the macro-economic factors that attribute significantly to markets volatility.

To understand this better, crude oil prices play a significant role in the country’s economy and any change in the country’s economy bears a direct effect on equity markets. In the past, volatility in crude prices has been a significant influencer in the volatility of domestic equity markets, capable enough to bring about wild index movements. In such times of volatility, caution in the market would be the mantra – mainly avoid big call on the market and do selective stock picking.

Market volatility cannot be predicted or wished away but can be managed well. Every participant or investor has to draw key lessons while trading or investing in such times.

Incorporate volatility and dynamism in your investment strategy

Markets investments are highly dynamic in nature and volatility is one of the major factors that adds this dynamism to it. In order to manage such wavering waters, an investor is required to maintain a vigorous and varied investment strategy. This should be designed in such a way that while they continue to benefit from strong economic growth factors, at the same time they manage and even benefit from volatility. In other words, be well-positioned to invest in a turbulent investment landscape. In fact, markets, politics, monetary policy, global trade, international relations, and so many other areas of life and commerce are influenced by volatility. Hence, it is of paramount importance to learn from volatility caused due to macro factors and incorporate it into one’s investment strategy.

Buy on lows and sell on highs

Sharp volatility frightens most investors. Only the seasoned investors have learnt their way into this volatility and emerge triumphant, but a majority are prone to making bad decisions. A large number of investors, most of whom are young or relatively new entrants in equity markets, enter the markets when indices are at the top and company valuations breaching the roof.

This syndrome is nothing but the result of greed and the desire to earn quick profits. Hence, a large number of such investors sell on panic when markets are volatile or trending in red. However, a seasoned investor maintains adequate liquidity to capitalise on the investment opportunities that volatility throws up. Instead of fearing volatility, use it as a buying opportunity as most of the stocks are at their low. Remember to buy on lows and sell on highs.

Be realistic

Define risk and expected return appropriately. Do not expect too much profit too fast. Successful investors control losses quickly and seldom lose big money. Strategies like hedging with options, limiting orders to sell stocks automatically, should the prices drop by 10%, etc. should be implemented to manage such situations.

Regularly review your portfolio

Having clarity with your investment objectives and your risk appetite is much desired. Based on this, have a simple strategy and revise it frequently to avoid any deviation from your objectives. Review performance at least once or twice a year, and rebalance portfolio.

Today all the information is in public domain which makes it an easy task. Find out if your portfolio has under-performed or outperformed, whether volatility has been lucky for you or otherwise. Analyse the past and understand the present and the future.

Avoid margins

It is strongly advised not to play margins and that too with leverage in a volatile market. Even the most sophisticated investors resist from taking any market positions. This becomes more important if you are investing with borrowed money.

Invest in mutual funds

Market volatility can be well managed by investing in mutual funds. It has been observed that in last 10 years, an average performing MF scheme has also generated returns above 15%, which is significantly better than assets like fixed deposit, insurance, corporate bonds, and government schemes.

Volatility is one of the best times to invest in MF if you believe in the long-term potential of a fund.

To sum up, stay invested in the market for long-term as passive investment strategy helps earn higher returns and manage volatility better than frequent portfolio churning, which only increases losses and stress.

(The writer is CEO, Taurus Mutual Fund)