Equity markets are influenced by a lot of external factors, and there are times when it crumbles or sees a lot of volatility. Stock markets are affected by geopolitical crises, rise in policy rates, steep rise in inflation and many more factors. During times like these, it becomes difficult to assess the projected market cycle and plan the investments.
Typically, the Indian markets have shown signs of recovery after a volatile period, like the most recent recovery cycle taking place with Sensex touching new highs this year.
Even if the long-term future shows promising returns, market corrections are bound to happen during a volatile market period, which is why it becomes imperative to protect equity gains during this time.
Volatile markets usually consist of steep losses followed by short covering rallies in a continuous cycle. Seasoned investors try to take advantage of a volatile market to maximise profits.
This typically involves engaging in different strategies to protect the capital and previous gains while working towards short-term returns.
Here are some common ways in which investors can attempt to protect their equity gains in a volatile market.
Review the asset allocation
When it comes to asset allocation, three things need to be kept in mind: risk appetite, tenure and financial ability. Volatile markets could be the best time to invest in quality stocks because of their consistent performance.
When markets start moving upwards during the recovery phase, these are the equities which will give good returns. Examples of such stocks in India are Reliance Industries, Hero Moto, HDFC bank etc.
Aim for staggered investments
Investors should never invest a lump sum during a volatile market cycle because it could lead to rapid capital depletion.
For investors with a lesser risk appetite, investing around 10% to 20% in equities and the remaining in debt funds could help them get through the volatile phase. Investing through SIPs (Systematic Investment Plan) to reduce the market risk is also a viable option.
The fixed amount invested every month will help investors spread their investments and protect their equity gains from being depleted at once.
Develop a diversified portfolio
Diversifying a portfolio is recommended to every investor and is one of the first things any new investor learns. In a volatile market, different sectors tend to perform differently. Therefore, having a spread of different equity investments can help hedge the returns in an effective way.
Investing in equities from each sector like automobile, IT, healthcare, FMCG, banking sector and more would help in lowering the exposure. For example, during the lockdown, pharma stocks were expected to do well when compared to any other sector like the automobile sector.
Rebalance the portfolio regularly
One can look at rebalancing the portfolio when market cycles are at a peak or at a low. For example, investors may look at booking profits when markets are high, and equities are giving good returns.
This amount can be invested when markets fall, and prices are low and look attractive. This gives a hedge against valuation and liquidity.
Stocks do not have the same rallies
Every rally is driven by different stocks. For example, the 1999 rally was driven by IT and media, while the 2006 rally was driven by real estate and infrastructure. The rally in 2013 was focused on private banks and automobiles.
Based on market research, investors need to focus on stocks that may be responsible for the next rally and make sound investment choices to protect their equity gains.
Focus on long-term goals
Usually, volatile markets have a short span. If an investor has adequate resources, the focus should remain on long-term gains.
A recession can also prove to be a buying opportunity for people who have money to invest. This time the equities should be available at comparatively lower prices.
For example, during the 2008 recession Mindtree Ltd was available at Rs. 85. If someone invested that time with a long-term view, then today they would have made a fortune as the current price of this stock is above Rs. 3,500.
Know the difference between volatility and risk
Risk is a common downside of investing in the equity market. Understanding the risk appetite and adopting technical methods of investment planning can help reduce the amount of risk an investor takes.
Volatility, on the other hand, is determined by assessing the speed and volume with which the price of stock changes. A more frequent and apparent swing denotes higher volatility.
External factors often cause the entire market to become volatile. Needless to say, volatility causes an increase in market risk. This is when investors must review their strategies and protect their gains.
The golden rule of investing in volatile equity markets is to invest when the prices are low and sell when the prices are high to book profits and lower the average buying price.
Patience, focus and discipline are a must while investing in a volatile market. Avoid herd mentality, which means that instead of following others, investors should do their own research and then make investments that with the potential of giving good returns.
It is advised to invest in companies with strong fundamentals and those that have strong financials with higher growth potential.
(The author is Co-head of Products & Solutions, Sanctum Wealth)
Disclaimer: The views and recommendations are those of the author and not of MintGenie.
