The ongoing Russia-Ukraine war has led to a complete mayhem of financial markets across the world, including the spike in global oil prices which have hit their seven-year-high. The wide volatility has left investors across the board anxious and sceptical of their investments - -as well as the way they make investment. Some of them are consciously rethinking and re-analysing their investment strategies.
Experts advise that those who do not have the risk appetite to sail through such turbulent times should make index investing their ideal choice since it is a relatively lower risk option (although not completely safe either) for equity investors. These funds don’t need a demat account, and one can make investment via SIPs (systematic investment plans) too.
“Investors can follow one of the two strategies. First, if you have a lumpsum amount, it is advised to invest in the index in a few tranches. This way you can take advantage of further fall. Alternatively, those with an investment horizon of at least seven years can even consider SIP investments,” says Deepak Aggarwal, a Delhi-based financial advisor and chartered accountant.
The experts advise that it is better to choose index funds because it offers diversification over making concentrated investment where you invest in a few companies. “When you invest through a fund, the investment gets diversified across different companies. This reduces the risk as the money is invested in multiple companies. In direct equity, it is more concentrated investment as you will invest in a few or limited companies,” says Harshad Chetanwala, Founder of MyWealthGrowth.com.
He further argues that during volatility, investors can explore index funds as well as active funds where they can find attractive valuations during such times.
“In case of Index funds, the investment is done in top 30 or 50 companies based on market capitalisation. In a volatile market, it can also be good to consider active funds as these funds also may look at valuations that may be available at attractive prices during environment,” adds Mr Chetanwala.
Average rolling returns CAGR (in %)
|Nifty 100 TRI||15.1||11.8||11.7|
|Nifty 500 TRI||15.7||11.7||11.5|
(Source: ACE MF)
As we see in the chart above, the rolling returns for five years hover around 11 percent for most index funds, for one year — the returns range between 14 to 15 percent per annum.
Ankur Kapur from Plutus Capital calls investing in index fund the most conservative and economical way to get exposure to the blue-chips.
“Investing in an index is the most conservative way to invest in large-cap equities. Since there is no fund manager, the expense ratio is quite low. However, the opportunities in mid and small cap are quite diverse and an active manager can add a lot of value,” says Mr Kapur.
He further adds, “Irrespective whether an investor chooses an index fund or an actively managed fund, market volatilities will impact both. Investor should opt for equity investment only when the investment horizon is more than five years.”
So, we can see it’s not the market volatility that is the cause of problem, but it's the resistance to tweak the investment strategy. Winston Churchill has rightly said: The pessimist sees difficulty in every opportunity. The optimist sees the opportunity in every difficulty.