Adani Group stocks lose half of their market-cap in just 7 days; how to invest in the era of extreme volatility?

The market has been punishing retail investors for the last one year.

It looks for the majority, trading is only about losing money.

Weeks ago, market regulator SEBI in a report said that 89 percent of the individual traders, which means 9 out of 10 traders, in the equity Futures & Options (F&O) segment, incurred losses during FY22, with an average loss of ₹1.1 lakh.

The latest Adani-Hindenburg saga has left many traders smarting under severe pain.

Creating wealth takes time but its erosion is rather quick!

Before we get into how to save ourselves in this market, let's briefly understand how an empire like Adani Group, which looked robust just weeks ago, can be severely damaged in just a few days due to the market selloff.

The rise and fall of the Adani empire

A US short-seller Hindenburg Research releases a report on the Adani Group on January 24, alleging "brazen accounting fraud, stock manipulation and money laundering" for over a decade.

This wreaked havoc on Adani Group stocks; shares of the Group's flagship firm Adani Enterprises collapsed nearly 54 percent on NSE in the last seven sessions.

This stock jumped 126 percent in the year 2022 on NSE.

According to Forbes, Gautam Adani's net worth jumped sharply in the last two years. In 2020, his net worth was $8.9 billion dollar which jumped to $50.5 billion in 2021 and $90 billion in 2022. In September last year, he was the world's second richest person for a brief period.

As of February 4, Gautam Adani is now at the 17th position among the richest people on the World's Real-time Billionaires list of Forbes, with a net worth now standing at $61.7 billion. Remember, this World's Real-time Billionaires list of Forbes fluctuates with time.

The Hindenburg blow made the 10 listed Adani Group stocks lose about half of their market value in just seven training sessions.

The rise and fall in the market capitalisation of Adani Group stocks raise fundamental questions about the way of investing in the current era.

How to save your investments in this era?

India has been witnessing a sharp rise in the number of retail investors in the last few years. This rise has been rather steep in the post-pandemic era due to several factors, including the availability of free trading platforms, cheaper data and the pursuit of another source of income.

When the market started rising after the steep fall in early 2020, many made money. But this lured many inexperienced and first-time investors to F&O trading. Getting rich quickly looked easy in the era of social media; you can get free trading tips on YouTube, Instagram, Twitter, WhatsApp groups and Telegram channels.

As G Chokkalingam, Founder & Head of Research at Equinomics Research & Advisory pointed out that the registered investor base in the stock market has nearly tripled in the last five years to more than 12 crore now.

As a lot of individual investors have shifted their focus to the F&O segment, the market volatility has increased tremendously of late.

Chokkalingam highlighted that the overall market capitalisation of all listed stocks on BSE, ever since hitting an all-time of nearly ₹287 lakh crore, has become extremely volatile; it lost as much as or even more than ₹40 lakh crore several times and then recouped to ₹287 lakh crore in the last two years.

"The overall market cap has crashed by about ₹20 lakh crore from its peak in the last one month. In the last six months, the damage to the small caps has been extremely high. BSE B Group segment, which largely represents the smallcaps, fell by 36 percent from its peak value of over ₹15.50 lakh crore in FY22 to just ₹9.9 lakh crore now," said Chokkalingam.

How to make money in this market?

The first and basic step one can take is to understand the importance of taking pragmatic risks and having rational expectations.

Investing is like running in a certain direction; that direction is your financial goal.

Have a clear goal and a clear understanding of your risk appetite. For example, mid and smallcap segments can give better returns than the largecap segment but they carry more risks too. You need to ask yourself if you are ready to take that risk in this volatile market.

"Retail investors have to understand the fact that while the whole equity asset class is risky, the small and midcap (SMC) segment carries much higher risk as compared to large caps or broad index (the Sensex / Nifty) stocks," says Chokkalingam.

Some of his suggestions are:

(1) Never start with a huge investment in direct equities unless you are a thorough professional in the equity business.

(2) Never use borrowed money for equity investments. It should always be part of your savings or surplus money.

(3) Never put all financial savings into equity asset class alone. Mitigate the risk by allocating savings across asset classes. Ensure that at least 40 percent (based on risk profile, the durability of income, etc.) of your total financial savings are invested in safe fixed-income securities.

(4) Never risk your investments in fixed income for the sake of higher interest rates. Never compromise on the quality of fixed-income instruments just for the benefit of higher interest rates.

(5) Within the equity asset class, put a minimum of 30 percent (minimum 50 percent for the conservative investors) of the total allocation to the Sensex / Nifty stocks.

The history of the last 20 years reveals a unique fact that SMC (small and midcap) segment falls much more than the Sensex and Nifty whenever the benchmarks fall significantly. It is quite rare that the SMC indices rise significantly when the Sensex and Nifty fall.

SMC stocks are highly influenced by market sentiment even when their fundamental outlook doesn’t change.

For example, a selloff in Adani Group stocks roiled market sentiment, triggering a 10-15 percent fallin many mid and smallcap stocks.

(6) Allocate another 30 percent (based on risk profile) of equity resources to the balance stocks in the top 250 stocks (in terms of market cap ranking) as the focus of mutual funds (MFs) within the large and midcap funds is on these stocks largely and the dominance of MFs along with domestic institutional investors (DIIs) is growing steadily while the share of FIIs in Indian equity is coming down.

(7) The remaining 20 percent to 40 percent can be invested in SMC stocks which are outside the top 250 stocks. While conservative investors could limit the exposure to these SMC stocks to 20 percent, risk-taking investors can go up to 40 percent of total equity investments in these stocks.

"Never have 100 percent exposure to SMC stocks unless you are an experienced professional in the equity markets and also have a higher risk appetite. It should be noted that the SMC indices once in three or four years fell badly in relation to the Sensex / Nifty. However, once in three or four years, the SMC stocks also give phenomenal wealth creation opportunities provided the investors do not compromise on the quality of promoters of the companies, strength of the balance sheets and valuation comfort," said Chokkalingam.

Chokkalingam said it is also worth investing always in a phased manner (SIP) as the extreme volatility is here to stay in the equity markets.

Retail investors can also consider listed ETFs of gold and silver as they tend to move up along with the depreciation of the rupee even if the global prices of silver and gold remain stagnant, he said.

Investing is not gambling. As India remains one of the fastest-growing major economies in the world, long-term investors would ultimately get rewarded. It is just that one needs to invest on the basis of fundamentals and also have the patience to remain invested for the long term.

Disclaimer: The views and recommendations given in this article are those of individual analysts. These do not represent the views of MintGenie.