Should you stay away from a falling equity market?

6 MinsFeb 10, 2022

The Indian equity markets have turned quite volatile of late, with factors contributing from both domestic and global fronts. That being said, volatility is the very nature of equity markets. Our investment success depends on how we use volatility to our advantage and devise an efficient investment strategy. "Successful investing is about managing risk, not avoiding it," Benjamin Graham

equity market to your advatage


Here are some tips to help you sail through the volatile equity markets:

(1) Go over your investments and rebalance them

“If the valuation of equity markets look stretched, then it makes sense to balance your allocation mix. In order to mitigate the impact of uncertain and volatile markets, diversify your investments into a variety of avenues within the asset class or different asset classes, as the case may be, basis your overall risk profile and preferences. This will help to minimise the risk and optimise returns”.

Make it a point to review your equity holdings—whether they are equity mutual funds or stocks. This will help you cull out underperformers, replace them with better alternatives (by fundamentally evaluating the investments), and consolidate the investment portfolio.

Your objective should be to:

  • Improve the risk-return potential of your portfolio
  • Align your investments with your risk tolerance and financial objectives.
  • Ensure the portfolio is liquid, well-diversified (not over-diversified), and that you can comfortably achieve the envisioned financial goals

To shield your portfolio, address short-term goals, and build an emergency fund, consider parking some money in fixed income instruments, such as a bank Fixed Deposit and certain small saving schemes, for secure and steady returns.

In addition, consider allocating 10-15% to gold via Gold ETFs. The yellow metal is an effective portfolio diversifier, a hedge against inflation, and commands a store of value in uncertain times.

Also Read: [Tips for Selecting Best Equity Mutual Funds]

(2) Stagger your investments or even increase it gradually 

Avoid investing your entire investible surplus all in one go; consider investing in a piecemeal manner, whether you invest in stocks or equity mutual funds. Use the Systematic Investment Plan (SIP) route for investing in equity mutual funds. This approach works relatively better when planning for long-term financial goals, viz., your child’s future needs (higher education and wedding expenses), and retirement, among a host of other goals.

When the equity markets fall substantially, you may consider deploying an additional portion of your investible surplus as a lump sum investment. The amount could be invested in your existing mutual fund schemes or stocks, or new ones depending on the value and growth potential the investment offers. The basic idea is to make the best use of the steep corrections and see your money grow over the long term.

You could also consider stepping up your current SIP instalments when the markets have corrected substantially. This can be done by either a fixed amount each year or by a fixed percentage. By doing so, you will gain from the power of compounding. You will be able to counter inflation and build the required corpus for your financial goal sooner.

Select the mutual fund scheme based on your risk profile, financial goals, and after proper assessment of a host of quantitative and qualitative parameters.

(3) Do not discontinue your existing SIPs

Do not stop or discontinue them just because the markets are falling or have turned volatile. Basing your investment decisions on emotional biases like fear may prove counter-productive and put the brakes on the process of compounding.

If you stop SIP now and/or redeem your investment, you would lose out majorly on the market recovery. Historical data indicates that every corrective phase of the market is followed by a recovery. While the equity markets have seen a variety of negative events in the past, they have also seen an unprecedented recovery supported by positive undercurrents. Hence, what matters in the journey of wealth creation is your patience, or ‘time in the market’ and not timing the market.

(4) Hold optimal cash

When investing, holding optimal cash levels is just as important as investing. It helps us to not only seize the valuable investment opportunities that come our way, but also empowers us to handle any financial emergency. Hold sufficient money in a Savings Account, a short-term Fixed Deposit, or debt mutual funds such as an Overnight Fund, or a Liquid Fund (having no exposure to private issuers and investing only in Government Securities, Treasury Bills and AAA/A1+ rated Public Sector Undertakings) to address any exigency.

 

Remember, wealth creation is a journey; so stay focused and employ these tips to sail through the twists and turns that come your way.

Disclaimer: This article has been authored by PersonalFN, a Mumbai based Financial Planning and Mutual Fund research firm. Axis Bank doesn't influence any views of the author in any way. Axis Bank & PersonalFN shall not be responsible for any direct / indirect loss or liability incurred by the reader for taking any financial decisions based on the contents and information. Please consult your financial advisor before making any financial decision