The Bombay Stock Exchange Sensitive Index – BSE Sensex – has lost over 5 per cent in the last five days, which would make even seasoned investors rethink their investment strategy. Such a shaky market may also cause scary new investors to slip away from the equity markets, vowing never to come back again.
So, what could be your investment strategy to minimise the effect of market volatility on your portfolio?
Apart from creating a diversified portfolio with quality stocks, you may take the following steps to create a buffer to protect your portfolio from the impact of a roller coaster ride during market volatility:
Avoid Lump Sum Investment
Instead of accumulating funds to invest in equities at one go, you should invest in equities in smaller amounts on a regular basis. This is because, larger the amount invested, more will be the quantum of loss in case of market meltdown. For example, in case of a 5 per cent crash, the amount of notional loss will be Rs 50 in case you invest Rs 1,000. However, if the investment amount is Rs 10 lakh, the amount of notional loss will be Rs 50,000.
So, the psychological impact of the same meltdown would be different, depending on the quantum of investment.
Choose MF over Direct Equity
In case you are a new investor having little knowledge about the market and lack of experience in equity investments, it’s better to enter the equity market through the Mutual Fund (MF) route, rather than investing in individual stocks. This is because, unless you have ample time and interest to track and study the markets, it will be better for you to leave the job to the professional fund managers employed by the Asset Management Companies (AMCs) to manage the fund for you.
Moreover, you need to invest large amounts to invest in individual stocks to diversify your portfolio, while you will get a part of a well diversified portfolio by investing small amounts in an equity-oriented MF scheme. As you can invest small amounts through MF, the quantum of notional loss would be less, compared to the large investments made in direct equity to achieve the same degree of diversification.
Choose SIP Route
In case of lump sum investment, unless the value of the stocks in your portfolio move above the value at which you made the investments, it will be a notional loss for you. However, if you invest the same amount in a regular interval through a Systematic Investment Plan (SIP), you will acquire more units for the same installment amount when the market is down, while there will be notional gains when the market is up.
So, both up markets and down markets are beneficial for the investors investing through SIP, which will not only average the market risks, but by acquiring higher units during lower market cycle, the probability of notional gain would also be more for such an investor compared to a lump sum investor.