Realigning strategy: Ways to ride out market volatility | The Financial Express

Realigning strategy: Ways to ride out market volatility

Focus more on risk management, buy on dips, and avoid big changes to asset allocations or lumpsum investments in mutual funds.

Realigning strategy: Ways to ride out market volatility
Experts suggest that investors see this as an opportunity and start accumulating quality stocks in a staggered manner and wait patiently.

With the hawkish US Federal Reserve stoking fears of an aggressive interest rate hikes, the indices have witnessed significant moves on both sides and the near-term volatility is likely to remain. Experts say investors should focus more on risk management during market volatility, avoid big changes to asset allocations, buy on dips, and avoid lumpsum investing in mutual funds.

Buy on dips

Experts suggest that investors see this as an opportunity and start accumulating quality stocks in a staggered manner and wait patiently. They should, however, not chase low-grade cheap stocks and expect high returns from them. Investors should look at high dividend paying stocks because even if the price of the underlying shares fall, they can still earn steady dividend income which will be beneficial in the long run.

Equity mutual fund investors should look at dividend yield schemes for higher tax-efficient returns as they invest in stocks of dividend yielding companies with a preference for firms that have a consistent track record of paying dividends at the time of investment. Naveen Kulkarni, chief investment officer, Axis Securities says the near-term volatility might increase in the equity markets. “Investors with a long-term view should utilise the increased volatility to increase exposure to equities,” he says.

Avoid lumpsum investments

Experts say the current market conditions are not ideal for lumpsum investments in mutual funds. Instead they should opt for SIPs. The biggest advantage of an SIP is that the investor does not have to time the market. More units are purchased when a scheme’s net asset value (NAV) is low and fewer units when the NAV is high. As a result, the cost is averaged out in the long-run. Investors who are willing to invest in stocks directly can look at stock SIPs which are offered by brokerage houses.

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Stick to asset allocation

As the stock prices have moved up, investors should do some profit booking and invest the money in debt. Ideally, in volatile times, investors should pare exposure to mid-cap and small-cap stocks and increase exposure to large-cap stocks. Also, investors must remember their financial goals and the risk appetite. A stock price trading at a cheap valuation does not mean it is a quality stock. Again, a stock trading at a premium does not mean that it is not a quality stock. So, sudden market movement should not act as everyday triggers to act. Investors must look at asset allocation which will help them to take tactical and strategic calls in the portfolio.

Invest in hybrid funds

Mutual fund investors should look at balanced advantage funds as they can help mitigate market volatility and returns on such funds are more dependable over longer periods as the investment is spread out. These funds are open-ended hybrid funds and they limit the downside and optimise the potential upside in a volatile market. An investor can gain when equity markets move up and protect it when they go down. So, an investor can gain from both rising and falling markets by investing in these funds.

Investors can also look at multi-asset funds as they invest in a combination of equity, debt and gold exchange traded funds. Typically, multi-asset funds have an equity allocation of around 65% and the rest in debt and gold. One of the main advantages of multi-asset funds is that higher returns from a particular asset class can offset the poor returns from the other class. These funds are better than investing directly in stocks, bonds or gold as the fund house does the rebalancing and helps the investor to hold a diversified portfolio.

Smart investing

* Equity mutual fund investors should look at dividend yield schemes for higher tax-efficient returns

* Investors who are willing to invest in stocks directly can look at stock SIPs which are offered by brokerage houses

* Pare exposure to mid-cap and small-cap stocks; instead go for large-cap stocks. Look at balanced advantage funds or multi-asset funds

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