Stock Market Investment: What should investors do in times of COVID-19?

Published: May 7, 2020 12:02:18 PM

The recent downturn in the markets has emphasised the fact that investments in equity should not be aimed at short-term gains as a primary strategy, but rather at growth in value over the longer run. 

stock market, Stock Market Investment, What should investors do in times of COVID-19, Market Outlook, large caps, fixed income instruments, commodities Markets are generally forward-looking, and it appears that a significant portion of the negative effects of COVID-19, and the economic slowdown, has already been discounted.

Factors such as the government-imposed lockdown and the resulting fall in flagship Indian indices have turned the attention of the Indian salaried class, who believe in the country’s growth story, to the stock markets, and look at this period as a good opportunity to invest for the long term.

Over the last few months, we have seen a marked increase in the number of new investors, considering the number of accounts opened with Zerodha. In March alone, we have seen a MOM rise of about 100%. The segregation between online and offline brokers has become less distinct over the last couple of years, with most brokers having both an offline and online presence. However, with the convenience offered by online account opening processes and digital platforms, we do see a shift towards more tech-inclined brokers.

Emerging Patterns among Retail Investors

The recent downturn in the markets has emphasised the fact that investments in equity should not be aimed at short-term gains as a primary strategy, but rather at growth in value over the longer run.

A pronounced portion of the new client base appears to be more conservative in their approach, with a preference towards investing rather than trading. Their investment horizon is more long term, without taking on risk in the form of leverage or borrowing capital for margin. Investors see good value at the current levels of blue-chips/large-caps and are entering these companies with a three to five-year timeline. To mitigate the risk of overexposure in the markets, most brokers have reduced leverages over the last month.

Hedging Risk in a Down Market

In a down market, algorithmic strategies and systematic trading can aid in mitigating risk. Not only do these tools increase efficiencies in the market, but also reduce impact costs. In comparison to the global landscape, the share of algorithms in Indian markets is relatively lower. Over the next few years, we see significant upward potential for algorithms to contribute to trading turnovers in the country.

Market Outlook & Recommendations

Markets are generally forward-looking, and it appears that a significant portion of the negative effects of COVID-19, and the economic slowdown, has already been discounted. Unanticipated news will determine any drastic market movements at either end. A slowdown in growth is inevitable, but signs of recovery will be instrumental in pushing markets back up.

In this market scenario, it is difficult to predict a firm bottom or top. However, valuations at current levels justify an allocation of large-cap equity in individual portfolios. HDFC Bank, for example, has fallen more than 25% since January, making it an attractive option at current levels. It is imperative to maintain a balanced portfolio, and I recommend a 60% allocation towards large-caps, 30% to fixed-income instruments, and 10% to commodities.

Advice for Investors

With interest rate reductions and uncertainty in the real estate sector, stock markets are becoming an increasingly lucrative avenue for capital inflows. While it is a good opportunity to enter the markets, caution is advised. We recommend maintaining adequate liquidity of at least 25% at individual portfolio levels, and to invest in the markets in a staggered, systematic way, without leverage, and with enough diversification across sectors.

(By Nikhil Kamath, Co-founder and CIO, True Beacon and Zerodha)

Get live Stock Prices from BSE, NSE, US Market and latest NAV, portfolio of Mutual Funds, calculate your tax by Income Tax Calculator, know market’s Top Gainers, Top Losers & Best Equity Funds. Like us on Facebook and follow us on Twitter.

Financial Express is now on Telegram. Click here to join our channel and stay updated with the latest Biz news and updates.

Next Stories
1Real estate may bounce back sooner than expected post Covid-19
2Looking to buy term insurance? Buy now or pay up to 40% more!
3Taking EMI moratorium from SBI, ICICI Bank, Axis or any lender? Here’s why you should try to stop