Ever since Russia invaded Ukraine on February 24, financial markets across the world have rattled including those of India. Crude oil has spiked to its seven-year high and volatility is making new records every day. This has led to a sense of scepticism and fear among retail and ace investors alike. Notwithstanding the calls for calm and even of buying the dips, small investors have a reason to re-look at their investment strategy.
For new investors
During volatile markets, it is vital to understand that high beta stocks are more vulnerable to fall, as they are more sensitive to market movement. Beta is a measure of a stock's volatility with regards to the overall market. Also, mid cap and small cap funds tend to slide more during volatile market conditions since they outperform heavily during market rallies and underperform when the market declines.
Also, concentrated portfolios are often more volatile. So, if you are a new investor then instead of tying up your funds to a small category of stocks via concentrated funds – you can diversify your risk and invest in index funds.
“Seemingly simple process of stock selection is actually very complex. Even the legendary investor Warren Buffett has instructed the trustee of his estate to invest 90 percent of his money into an index fund, and 10 percent in treasury bills, for his wife after he dies,” says Dr Rachana Baid, Professor and HOD, School of Securities Education, National Institute of Securities Markets (NISM).
Deepesh Raghaw, Founder, Personal Finance Plan, echoes the same sentiments. “If small investors feel that their portfolio is highly skewed, say, 80 percent towards equity, they can revaluate it and bring the allocation down to say, 50 or 60 percent, depending on a number of factors,” says Mr Raghaw.
When you are already invested?
Regardless of the idealness of your portfolio, or the lack of it — you probably do not have a slew of options as of now. If you are already an investor, you may have no choice but simply to wait for this storm to pass.
Amol Joshi, Founder of Plan Rupee, although agrees with the underlying philosophy of staying away from beta and focussed funds for investors with low-risk appetite, but argues that existing investors can’t do much now. He says, “These decisions of avoiding high beta funds shouldn’t be taken when there is already 100-150 basis points movement on a daily basis. We have already seen volatility to the tune of 10-12 percent in large caps and 10-20 percent in mid and small caps. These decisions (of avoiding high beta stocks) are generally taken at the time of portfolio construction.”
On being asked what should be the plan of action for a lay investor now, Mr Joshi says, “It is the time to just lie low, and remain invested and wait for the markets to get stable before you relook at your portfolio. It’s not advisable to examine your portfolio when volatility is hitting you in the face.”
Diversification is the key
Some experts believe that investing in index funds is safe and reliable approach to sound investing. “For an average investor, investing in index funds would be far more rewarding in terms of risk adjusted returns in the long run than stock selection,” says Dr Rachana Baid.
There are times when funds from the same fund house are top performers in other categories. In such cases, investors invariably flock to those high return-yielding funds. But when the tide turns, which sooner or later would be the case, the strategy that helped the fund grow would bring it down. So, the experts often reiterate – Diversify, diversify, diversify.
But the key lesson which investors can learn is not to be faint-hearted.
“Sometimes the markets are more volatile and sometimes they are less but investors must make sure not to bring their guts into investing. They should just play strictly by the rules,” says Mr Raghaw.
Even when the war is on.