1. Why it is not advisable to time the market amid volatility

Why it is not advisable to time the market amid volatility

As equities go through a volatile phase, it’s tempting to time the market. Why it’s not advisable

By: | Updated: September 1, 2015 9:42 AM
In fact, equity as an investment has outperformed all other asset classes in the past with a wide margin.

In fact, equity as an investment has outperformed all other asset classes in the past with a wide margin.

After the 30-share BSE Sensex lost 1,625 points on August 24, the benchmark index recovered  542 points by August 31. Even in the past, there have been large corrections on a single day or even for a longer period, but the markets recovered and rewarded those who have stayed invested for a long time.

In fact, equity as an investment has outperformed all other asset classes in the past with a wide margin. For example, over a 25-year period starting 1990, equities have generated an annualised return of 15% as compared to 10% for gold. For retail investors, the steep fall in the markets provides opportunities, especially at a time when the domestic economy is showing some signs of improvement — inflation is down, tax collections have risen, and government’s capital expenditure is on the rise.

At a time when foreign institutional investors (FIIs) are pulling out of India, domestic institutional investors (DIIs), led by Life Insurance Corporation of India, are investing in Indian stocks. In fact, in August, DIIs have invested more than R15,000 crore in equities, which is the highest monthly investment by them in six years, clearly indicating the changes in the macro environment.

Analysts say India will once again emerge as an attractive investment destination. While sharp corrections may provide an opportunity to buy, one must not get into a buying frenzy and, instead, stay tuned to their asset allocation. Analysts also say retail investors need not panic and sell. Asset allocation must be based on goal, the amount of risk one can take and the time frame to reach the goal.

A Nomura report says the sell-off in the markets has been indiscriminate, leading to correction across the board.

“This means that even companies that are potential beneficiaries of lower commodity prices and currency have seen significant share price corrections,” the report says. So, in such a situation what should retail investors do?

Invest in SIP

Investing through systematic investment plan (SIP) of mutual funds is one of the best ways to counter volatility as it brings in discipline and long-term approach for retail investors. With every dip in the stock market, the SIP instalment will bring more units for the investor and lowers the average cost of purchase. Investors must stay put in SIPs and should even consider to step up the amount.

Rebalance portfolio

During volatility, it is ideal to sell those stocks that have not performed well and add quality stocks with medium-to long-term view. Those tempted to do bottom fishing must stay clear of companies that do not have a sound cash flow, earnings are poor and have weak corporate governance.

It is better to invest in large caps as against mid-cap stocks as the former will be in a better position to ride the tide against volatility. In the last one year, mid- and small-cap stocks have generally outperformed large-cap stocks.Analysts say during volatile times, one must not buy a stock based on its price alone and must first assess the value of a stock to see if the price is cheap or not.

Avoid stocks with high FII stake

It is always advisable to stay clear of stocks that have high FII holding as they are the first to sell off at the slightest hint of any volatility. Analysts say retail investors should invest in stocks that have a balanced mix of FIIs and DIIs as it will result in gains when the markets recover.

Look at fundamentals

If the balance sheet of the company is weak, then even a profitable firm can quickly go bust if earnings drop. A report by Emkay Equity Research says in the near term, the market scenario will be influenced by both domestic and global factors.

The report says investors must focus on stocks that have earnings visibility, no regulatory risks, stocks which will benefit from the weakening of the rupee against the dollar, and also equities which are more focused on urban rather than rural. The easiest way to identify beneficiaries of a fall in markets, according to a Nomura report, is to look at companies that benefit from a fall in commodity prices or a lower rupee.

Similarly, a Kotak Institutional Equities Research report points out that the valuations of the market is more reasonable after the recent sharp correction and lower valuations and weaker rupee can provide for meaningful returns (15-18%) over the next 12 months. “The recent sharp correction in the market and, in particular, of high-beta sectors such as banking, provide interesting investment opportunities among large-cap stocks,” the report says.

Slow and steady…
* Investing through systematic investment plan of mutual funds is one of the best ways to counter volatility
* With every dip in the stock market, the SIP instalment will bring more units for the investor and lowers the average cost of purchase
* During volatility, it is ideal to sell those stocks that have not performed well and add quality stocks with medium-to long-term view
* It is better to invest in large caps as against mid-cap stocks as the former will be in a better position to ride the tide against volatility
* It is always advisable to stay clear of stocks that have high FII holding as they are the first to sell off at the slightest hint of any volatility
* Invest in stocks that have a balanced mix of FIIs and DIIs as it will result in gains when the markets recover

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