In the last five trading sessions, the benchmark Sensex has lost close to 3,000 points because of likely aggressive rate hikes by the US Federal Reserve, rising inflation, weaker-than-expected fourth-quarter earnings, and surging Covid-19 cases in parts of Europe and China. In the debt market too, the yield on the benchmark 10-year government securities has spiked to 7.16% on April 18 from 6.46% on January 3, and the Reserve Bank of India in its monetary policy review on April 8 has signalled that its focus is now shifting from reviving growth to reining in inflation.

Spiralling inflation

The Consumer Price Inflation touched 6.9% in March, a 17-month high and remained above the tolerance limit of the central bank for the third straight month. The wholesale price index accelerated to 14.5% in March from 13.1% in February. Experts expect RBI may start increasing interest rates soon and the quantum of hikes will depend on the inflation prints. In such a volatile market, experts advise individuals to lower their returns expectations from equities and keep asset allocation in place. They should look at investing in quality stocks on dips, invest in floating rate funds and target maturity funds in fixed income and take some exposure in gold exchange traded funds.

Equity strategy

A market correction is an ideal time to buy quality large-cap stocks, especially companies that are delivering good numbers. Though midcap as a space will throw up good buying opportunities, investors need to look at the fundamentals and the cash flow of the companies. VK Vijayakumar, chief investment strategist, Geojit Financial Services, says a clear trend in the market is preference for value over growth. “This trend and the outperformance of the mid-caps are likely to continue. Investors will get buying opportunities in these segments on declines,” he says.

Vineet Bagri, managing partner, TrustPlutus Wealth, says if there are further dips this week, the sentiments would sour further and risk averseness would go up given that the result season has not started off on a good note. “Nonetheless, we suggest slow and steady buying on the dips especially for long-term investors and not shy away from the market entirely,” he says.
Debt: target maturity funds, floating rate funds

Target maturity debt funds are suitable if the investment horizon matches with the target date. If a rate hike happens, there will be a mark-to-market impact on these funds. However, if you hold them till maturity, the returns would be almost similar to yield-to-maturity as the volatility tends to reduce as the fund gets closer to the target maturity.

In case of rising interest rates, the investment in floating rate funds will offer lower duration risk as compared to longer-term fixed-income instruments. Experts say in a rising interest rate environment, floating rate funds could generate higher returns than other fixed-income funds as the returns from a floating rate fund are linked to the benchmark interest rate.

Diversifier: Gold ETFs

Investing in gold is a good diversifier, acts as a hedge against inflation and alleviates losses during tough market conditions and economic downturns. Gold ETFs reported net inflows of `205 crore in March after witnessing net outflows for two months in a row. Gold ETFs offered by mutual funds are a cost-effective option to buy the metal in the electronic form.

  • A market correction is an ideal time to buy quality large-cap stocks
  • Target maturity debt funds are suitable if the investment horizon matches with the target date
  • Floating rate funds can generate higher returns in rising interest rate scenario
  • Gold is a good diversifier, helps hedge against inflation