If you think that the stock market is going through its usual swing, then either you have just returned from a long vacation or you are weak in numbers.
So, as the stock market undergoes a phase of extreme volatility with little hope of a bounce back, at least any time soon, we dwell upon the right strategies which retail investors can deploy to minimise the risk.
Invariably, most experts assert that investors should adhere to these rules: Focus on value stocks, invest in large caps and dynamic asset allocation funds, keep substantial amount of cash to invest all the time instead of locking all your portfolio in equity. Also, make sure to avail the buying opportunity while the ‘iron is still hot’.
Experts also suggest that in view of the ongoing uncertainty, retail investors should invest in a few tranches to average out the cost, and importantly — stay away from borrowings to buy equity.
Essentially the market downfall is attributed to the pulling out of the market by foreign institutional investors (FIIs), say analysts. And the ongoing situation may turn worsen if the oil price stagnates above $100 for next few months.
“If the oil continues to trade above $100 for long, the GDP would decline to 6.7 or 6.8 percent from the current expected figure of 7.2 percent,” says S Sridharan, founder and principal officer, Wealth Ladder Direct.
Stay invested for long term
Most of the time, financial experts opine that investors should look at the long-term returns, and devise strategies accordingly. “We tell investors that when they invest in equity, anything longer than three years is ideal,” says Sridharan.
While underscoring the need to focus on long-term investment, Sridevi, a SEBI registered investment adviser, Chamomile Investment Consultants in Chennai, says investors should keep their money in equity regardless of the ongoing uncertainty.
“When you are supposed to sell equity depends on your financial goals. If the goals are far away, then you can stay invested. And in fact, you can currently accumulate stocks,” she says.
Ankur Kapur, Chartered Financial Analyst, and Founder of Plutus Capital also concurs. “Investing is all about long-term focus while balancing your short-term and long-term financial needs. It's the nature of the market that it will oscillate,” he says.
“However, it is extremely important to focus on your needs than the market. Timing the market often backfires even for the most mature investors. In the current volatile market, investors must continue with their asset allocation including monthly SIPs. A safe strategy is always to continue to invest and average out your costs,” says Kapur.
Averaging out the cost
The term of ‘dollar cost averaging’ was coined by the legendary investor Benjamin Graham in his book The Intelligent Investor. It implies that buying stocks equivalent to a particular value in currency terms at regular interval (say, every month) is better than buying them in one go.
Mr Sridharan also shares the advice of investing in tranches. “Instead of investing in one go, investors can do the cost averaging in six tranches across next six months,” he says. For this to happen, it is vital for investors to keep some cash with them as well.
"Investors should keep anywhere between 5 to 20 percent of equity portfolio in cash so that they can invest whenever the opportunity is right," says Chokkalingam G, Founder, Equinomics Research & Advisory, Mumbai.
Sridevi from Chamomile Investment Consultants also believes that it is a good time to invest but investors can refrain from investing in one go. “Since the markets are likely to stay volatile for at least next six months, investors shouldn't make any lumpsum purchase now,” she says.
Say ‘no’ to loans
Another important advice that financial experts give is that they should not borrow heavily to invest in equity. Instead, they should repay the loans if they could.
"If you take loan to invest and the market falls further, say, by 20 percent, then you will have to repay ₹110 (assuming interest of 10 percent) for ₹80 value. So, it is not rational to borrow to invest as of now," Chokkalingam adds.
About market projection, he believes that the bearish sentiment should not continue for more than six months to one year. “In the market, punishment and rewards happen fairly quickly now. If you remember, the market fell over 38 percent during Covid in a span of week,” he said.
Choice of stocks
At this stage, investors can seriously consider large cap funds or dynamic asset allocation funds. “One of the key advantages of large cap funds is that their bounce back happens faster than that of mid cap and small caps,” says Sridharan.
On the other hand, dynamic allocation funds handle their portfolio quite aggressively be it debt or equity. And they keep changing share their allocation across market capitalisation (large, mid and small caps) since there is no limitation.
About the choice of stocks, Mr Chokkalingam says that investors can explore value stocks and within that, one can prefer dividend yield stocks. These stocks may even fall, but they don't crash usually.
In addition, investors can explore growth stocks and invest in them in a phased manner. They should see the track record of the company they are investing into, evaluate the performance of management as well as of promoters, and see if the company’s balance sheet is strong or not.
“When a company has been listed recently, there is no track record. You should keep this in mind,” he signs off.
However, despite all these suggestions and tips, investors should exercise due caution and seek an expert’s advice before taking a big investment call.