As the mid-cap and small-cap stocks continue to bleed, the investors are in dilemma, whether to stay away from the equity markets or stay invested.
Although the Bombay Stock Exchange (BSE) sensitive index (Sensex) has come down from 38,896.63 points on August 28, 2018 to 37,494.12 points on August 26, 2019, but shedding 1,402.51 points or 3.6 per cent in one year is not a very significant loss. With the lowest points of 33,349.31 and highest of 40,267.62 points, BSE Sensex reflected the volatile nature of stock markets in the one-year period, with intermittent windows of opportunities to enter and exit the markets.
However, the BSE Sensex consists of only 30 top performing stocks among the 5,000 stocks listed with the exchange. Moreover, with some of the stocks out of the 30 top stocks outperforming the other stocks, the Sensex and even the broader NSE index, Nifty 50, didn’t reflect the actual picture of the equity markets during the period, as the mid-cap and small-cap stocks continue to bleed.
As a result, the investors are in dilemma, whether to stay away from the equity markets or stay invested. Forget the retail investors, after re-imposition of long-term capital gain (LTCG) and imposition of surcharge on LTCG, even big institutional investors also pulled their money out of the Indian markets, adding to the volatility.
So, what the retail investors do to take advantage of equity returns by minimising the market risk? Here are some tips:
1. Invest for long term
Retail investors should enter the equity markets with proper financial planning to fulfill their long-term financial needs. Unless long-term goals are determined and investments are made according to risk profile of an investors, he/she is bound to get perturbed by short-term market fluctuations and end up booking losses.
2. Do SIP
It’s always better to invest in equities through systematic investment plan (SIP), instead of lump sum investments. It is because, in lump sum investment, you will gain only when the value goes up. On the other hand, through SIP, money is invested in both up market and down market. While the net asset value (NAV) goes up, you will see gain and when NAV is down, you will get more units for same amount of money invested. So, it will average out the rupee cost, giving higher return in long run.
3. Avoid direct equity
Inexperienced retail investors should avoid investing in direct equities as investing in individual stocks need large investment and to diversify in various stocks, huge amount of money is required along with time and knowledge to track performance of the stocks. So, it’s better for novice retail investors to invest in equity mutual funds (MFs), where dedicated team of fund managers manage investments for the investors and the units of MF schemes consist of part of well diversified portfolio.
4. Avoid market buzz
After entering the equity market with long-term perspective, avoid the buzz created by experts through various medium. When markets cross 40,000 points, experts start discussing how soon will it touch 50,000 mark and how long will it take to reach 1,00,000 points, similarly, when markets go below 35,000 points, they would talk all negative aspects as if markets have doomed like anything and there is no way to recover. Listening to such buzz encourages herd behaviour and people invest when the market is up and pull out when market is low, thus losing their capital.
5. Take guidance
First-time investors should take help of experienced and dedicated financial advisors for financial planning as well as during the investment period. Entering the markets with financial planning would create a conviction towards the power of equity and counseling during market turmoil would be crucial to stick to the pre-determined path to achieve long-term financial goals.
Although the persistent volatility in broader market is a matter of concern especially for intra-day traders and lump sum investors, but the bigger worry is the economic slowdown, which has affected even the otherwise consistent rural demand. Until the economy enters up cycle, persistent broad market rally would not start.