The fluctuations in stock markets not only put the capital invested in equities at risk, but also provide opportunities to make gains on a daily basis.
The fluctuations in stock markets not only put the capital invested in equities at risk, but also provide opportunities to make gains on a daily basis. However, as the risk of earning negative return (as well as positive return) is maximum in the short run, it’s advised to invest in equities for the long run as the effect of market risk gradually fades out over time.
However, people having knowledge and expertise in stock market investments and time and interest to track markets as well as individual stocks may earn short-term return from equities as well.
In fact, it’s the job of the fund managers of mutual funds (MFs) and portfolio managers to track markets on a daily basis and invest in equities in the best possible ways – be it short-term or long-term – to generate maximum return for their investors.
So, equity investments may be aimed at getting both short-term and long-term returns. But whatever may be the aim, investors should never invest their emergency fund in equities.
For short-term gains, investors need to buy stocks at low and sell at high. Higher volatility provides greater opportunity to earn in the short term, while a sustained flat market at a high or low level causes problems for short-term investors.
This is because, at a high market, such investors continue to wait for market correction, losing time to generate returns.
According to American investor, mutual fund manager, and philanthropist Peter Lynch – “Far more money has been lost by investors trying to anticipate corrections, than lost in the corrections themselves.”
On the other hand, at a sustained low market investment money of short-term investors got stuck, as they continue to wait for market rise to earn targetted return.
“Investment decisions are based sometimes on trends and sometimes on certain situational philosophy. It is possible that certain investments may not meet the expectations set. It is also possible that exit may not be easily possible due to liquidity or the inability to take a loss,” says S Ravi, Former Chairman of BSE and Founder & Managing Partner of Ravi Rajan & Co.
However, in case of sustained low market situations, even short-term investors need to wait for a favourable opportunity.
“This is where the resilience of any investor comes into play. An investor who has invested from their own funds and can hold on to their investments is always a good strategy. It is not correct to generalise as the strategy would depend on individual scripts liquidity and the investment sector which form key to the strategy,” says Ravi.
However, in case borrowed capital is invested, investors have a limited scope for prolonged wait, as the interest on capital may exceed the prospect of making gains.
“If the investor has invested from borrowed funds one must disinvest as return may be less than cost of capital,” says Ravi.
In case of long-term investments, however, investors are generally not perturbed by short-term market fluctuations and wait for fulfilling their long-term financial goals.
“Resilience is the key as panic selling can impact the investors. A good long term investor should not be affected by stock fluctuations,” says Ravi.
So, depending on the situation, investors may not have any option, but to adopt the “buy and hold” strategy.
“A resilient investor normally watches the trend, gathers market information, assesses future prospects and does not panic before taking the decision,” Ravi further says.
Systematic investment plan (SIP) is one of the ways of reducing market risks further in the long run in comparison to lump sum investment. This is because, under SIP, investments are made periodically in both high and low markets, thus averaging the risk.