Long-term investors should not let market corrections dampen their spirits. Instead, they should buy more stocks when the prices are low to bring down the average price for the shares
As the BSE S&P Sensex has dropped around 6% since March-end this year, many investors are getting jittery because of short-term volatility. Net inflows in equity mutual funds slowed down to Rs 159 billion in April this year, which is lower than the Rs 217-billion average monthly run-rate for equity inflows in FY18. Experts say investors should avoid knee-jerk reactions to sell off investment when the markets are going through corrections, as the fundamentals of Indian markets remain strong. In fact, as an investment strategy, it is sensible to make active use of corrections in the stock market as they can be a good buying opportunities and help even out risks in your investment portfolio.
Selling stock when the markets fall will not help and one will lose his invested money. Instead, one should consider buying more stocks when the prices are low to bring down the overall average price for the shares.
Ignore short-term volatility
As a long-term investor, do not let drops in markets dampen your spirits as the Indian markets are likely to deliver higher than expected returns. Take time out to reassess and reallocate your investment portfolio but always maintain stocks or investment instruments that are fundamentally strong. Before investing, look at cash flows, earnings, corporate governance, debt-to-equity ratio and returns. Investors must look at the price-to-earnings (P/E) ratio which is computed by dividing the market price with the company’s earning per share.
Selling your stock when it is low, as done by most retail investors, will not help as one will lose the invested money. The near-term volatility should not be a major concern unless the fundamentals of a particular stock or a sector doesn’t look encouraging. Instead, consider buying more stocks when the prices are low to bring down your overall average price for the shares. Investing in stock market should be seen as long-term as the purpose of investing in stocks is to build wealth.
Look at large-caps
Mid-cap and small-cap stocks can become very volatile. While the mid-caps success story has been a good one, the strong fundamentals and markets under pressure would mean that large-caps are likely to offer better consolidated returns over a long term. Look at large-cap stocks to build your portfolio for the long-run. Mid-caps have seen higher price cuts in the recent correction and their valuations are still high. In such a scenario, expert says it is better to stick to large-cap stocks because of their favourable valuations and the capacity to withstand slowdown in the economy.
Sunil Sharma, chief investment officer & executive director, Sanctum Wealth Management in a recent note says, both large and mid-caps trade at significant premiums on forward and trailing multiples vis-a-vis long term history. “So, looking only at prices and valuations does not yield significant insights. On the contrary, earnings and forward prospects throw up stark differences between the two.
Our models suggest a tilt towards a large-cap exposure on the premise of a more stable earnings growth delivery in an increasingly likely volatile market sentiment. Earnings expectations for mid-caps have de-rated in recent months while large-caps have seen more positive revisions,” he says.
Invest through mutual funds
With mutual funds, you can invest through systematic investment plans by investing small sums of money every month over a period of time. They are like a recurring deposit which enables an investor to buy units on a given date each month. One of the biggest advantage of an SIP for a retail investor is that one does not have to time the market and worry about the volatility. As an SIP is meant to tide over volatility in the markets, the longer the investment horizon the better it is.