As the third Covid wave remains a key threat to the market, which is expected to remain on tenterhooks in the coming days, it is important to find ways to counter the current volatility
Markets have remained resilient throughout the second wave of Covid turmoil. They have galloped their way with both the Nifty and Sensex touching new highs. In fact, even the most optimistic investor wouldn’t have thought the Sensex to scale the 50,000 peak after the mayhem it went through when the BSE market cap fell to `101. 86 lakh crore on March 23, 2020, following the rise in Covid cases and lockdowns.
Having said that, though markets have mostly seen an uptick, continuous flow of news and conversations regarding the new Delta Plus variant, a string of restrictions and a possible third wave hitting in the next few months have taken a toll on investors’ confidence sending them into a tizzy.
These have affected the psyche of investors and, as a result, have made the markets volatile. In the current situation, it’s essential to be patient and find out ways to counter volatility and sail through. Let’s find out how.Stick to Investments with Strong Fundamentals: Investments with strong fundamentals more often than not emerge as eventual winners. In the current scenario, when there’s an air of uncertainty going forward with the possibility of a correction doing the rounds, it’s crucial for you to invest in fundamentally robust instruments that have the ability to augment returns and counter losses.
Note that last year the market carnage didn’t spare anyone. Investments encompassing offerings from dominant players in their respective segments also took a beating. However, there was nothing fundamentally wrong with the way these companies operated. Those who remained committed to their investments got the desired results and markets rebounded at a breath-taking speed.
Seek help from professionals and rely on credible information provided by your investment advisor to pick up a winning bet in the long run. Irrespective of whether you invest in stocks, mutual funds, or bonds, make sure the fundamentals are robust.
Consider Overall Asset Allocation: One of the core tenets of investing and an evergreen strategy to negate volatility, asset allocation refers to investment in different asset classes to balance risk. Prudent asset allocation has been identified as a major success ingredient to achieve different life goals. In the current state of affairs, when things appear to be uncertain, it’s essential for you to get back to the drawing board and relook your overall asset allocation.
Distribute your investments across different asset classes to counter volatility and lend stability to your portfolio. Note that market movements affect each asset class in a different manner. While it can result in losses for one, the same means profits for another. It’s in your best interest to diversify as much as possible to remain cushioned and mitigate volatility.
It is equally essential to diversify within each asset class. For instance, while investing in equities, you can consider a mix of active and passive equities. Investment in a large-cap fund along with an index fund can harbor much-needed success. Always focus on companies that are strong in fundamentals, have strong management and good corporate governance.
Geographical Diversification: When domestic markets are looking precarious, a smart move to counter the threat is to look at international territories. Yes, geographical diversification can not only help you counter volatility but also augment returns. As per Goldmann Sachs data, while the average 10-year stock market return has been 9.2 per cent, that of the S&P Index has been 13.6 per cent.
For instance, if you choose to invest in the equity market of the United States (US), you participate in the growth story of several tech behemoths. Also, note that when you invest in foreign countries, incidents of domestic markets are likely to have less impact on your portfolio. In a nutshell, geographical diversification helps you offset losses in the domestic market by gains in the foreign market.
Avoid Investing in Penny Stocks: In a bid to ride the current bull market, many investors tend to invest in penny stocks. These are the stocks of companies with small market capitalisation and trade at very low prices, usually below `10 on stock exchanges due to low demand. However, they are quick to ride on any positive events and there’s a sudden spike in their prices, causing market frenzy.
Prices of these stocks are easily manipulative, and even a small buying of the scrips can send their prices soaring. To make some quick bucks, investors end up investing in these sets of stocks, which then see high selling, causing massive losses. At the same time, liquidity is a major concern now, due to the pandemic, and penny stocks offer almost zero liquidity as the trade volumes are pretty low. As these stocks never move parallel to major indices or sectors, they pose a huge risk to your wealth.
Look for Dynamically Managed Funds: An easy way to counter market volatility is by maintaining a fine balance between equity and debt as per market movements. While it can be difficult for you to do manually, funds that do so dynamically can take the burden off your shoulders. Such funds are also known as a Balanced Advantage Fund (BAF), which adjusts the equity levels based on a predetermined model, thereby reducing volatility to a great extent. The same also gives users a smooth investing experience.
The model could be trend-based that sharply cuts equity exposure when markets nosedive or hit a valuation that holds lower equity levels at peak valuations. It is important to note that while the volatility of average BAF over the last five years has been 12.6 per cent as compared to Nifty’s volatility of 18.6 per cent.
It’s also during periods of heightened volatility that investors tend to display their worst behavior by investing at peak and redeeming at lows. The dynamic management of equity and debt in BAF acts as a hedge against such emotions.
Avoid Acting under Impulse: In precarious times like this, most investors tend to get swayed by their emotions and make wrong investing decisions. They either quit fundamentally strong investments, turning notional losses into real ones, or follow the herd and end up investing in instruments that hardly serve their purpose.
It’s essential to remain patient and avoid knee-jerk reactions. Have a holistic view of your financial goals and take time to review your portfolio every six months. Identify laggards that have performed poorly in the long run and weed them out. Also, in the current scenario, quality stocks are available at attractive valuations. Adding them to your portfolio can enhance your riches by a long margin.
Summing it Up: Markets will remain on tenterhooks in the coming days. What’s essential is to block all noises and look at the big picture. Note that there’s little you can do to change the course of events. But, with the right mindset and a disciplined approach, you can ride choppy waters with ease. Markets have and will always reward patient and disciplined investors.
The author is EVP and Head, Edelweiss Personal Wealth