In turbulent times, capital preservation and loss minimisation is paramount
The Indian market has failed to carry on with the positive momentum that it had inherited from 2017 where the average yearly return was approximately 29 per cent. There have been two distinct phenomena reflected in the price movements of the stocks in 2018. While the broader market has continued to struggle since early April, benchmark indices had a spectacular run till August when the benchmark indices Nifty and Sensex hit their lifetime highs.
The tide has turned since then and now the benchmark indices are down almost 12 per cent off their August high. For 2018, as on October 31, the YTD return of Nifty50 is minus 1.38 per cent, Nifty midcap 100 index minus 18.83 per cent and Nifty small 100 index minus 33.58 per cent. The volatility index India VIX that started the year with a value of 12.67 on January 1 has reached to 19.79 per cent on October 31, indicating widespread panic in the markets.
The current market volatility can be attributed to various macroeconomic factors, both domestic and international. Sentiments turned mildly negative after the introduction of long-term capital gains tax (LTCG) in the budget in February. On top of it, the reclassification of mutual funds by Sebi forced AMCs to restructure portfolios and reduce exposure to midcap and smallcap stocks, which exacerbated selloff in the midcap, smallcap space.
Global headwinds such as the ongoing trade war between the US and China, continued strengthening of the US economy and hence the dollar has kept the emerging markets including India on their toes. In addition rising crude prices and depreciating rupee have led to the overall negative sentiments in the markets. Above all, the recent IL&FS fiasco and the subsequent liquidity crunch has led to a complete meltdown in the NBFC and housing finance company sector. At present, it seems the woes of the Indian market are never-ending although things have started to settle down somewhat since last week, it continues to be a moot point if this relief is temporary or the markets have finally bottomed out.
The current volatility in the market with wild intra-day swings has made it exceptionally hard for an average investor to stay invested. Even the long-term investors are rattled after significant value erosion in portfolios.
There are several mistakes that retail investors make during volatile markets and that make things worse for them. In turbulent times, capital preservation and loss minimisation is paramount, investors can benefit by following some of the investment rules that are listed below:
Avoid heard mentality: Panic selling and booking losses in the market meltdowns is the most common mistake that average investors make. When the market turns volatile it’s advisable to avoid knee-jerk actions. It is always better to evaluate the reason behind the price correction of a stock before taking a decision to exit it and book losses. If there is no change in fundamentals of the company than there is nothing to worry about price volatility as in the long-term the stock price will always get adjusted to the fundamentals. If one’s fundamental investment thesis is intact then perhaps continuing to stay invested is the right strategy, if there is some liquid available in the portfolio, market volatility is a good time to average down one’s portfolio.
Stay with original plan: At the time of high volatility, it’s often seen that investors change their financial and investing behaviour due to overall panic and stop their regular investments. Withdrawing funds from mutual funds, discontinuing an ongoing systematic investment plan (SIP) are precisely the things investors should eschew from doing. The basic tenet of an SIP is to make investments at regular intervals so that one gets benefits of cost averaging. Thus, discontinuing an existing SIP without any fundamental shift in the underlying investment product is never advisable.
Don’t catch a falling dagger: Market corrections are tempting at times for an average uninformed investor to go bottom fishing. Buying a stock solely because it has come down is never advisable. If there is a significant correction in a stock always investigate the reason behind correction. If the reason for the correction is mostly due to market sentiments then one can go ahead and buy a stock as chances of rebound are higher. But if reasons for decline don’t make sense and are related to corporate governance issue or other compliance related issues it is always advisable to stay away from the particular stock.
Never invest on leverage: The market correction often tempts investor to use margin or finance the purchase of shares by taking loan to optimise returns as margin investing and leverage can yield high returns. But it should always be remembered that leverage is a double-edged sword, it maximises both profits and losses and in situations where an investment decision is adverse the chances of huge losses are very high. An average investor should abstain from leverage products such as stock futures especially when markets are volatile.
Hunt for bargains: During market meltdowns all stocks good or bad get punished due to market sentiment. It creates an opportunity for value investors to hunt for fundamentally good stocks across sectors, which are available at deep discounts. One should look for value stocks with stable earnings visibility, stable management, strong pricing power or market presence, and strong corporate governance practices as their investment criterion for bargain hunting.
Diversify properly: Market meltdowns are perfect time to do a health check on one’s portfolio. One should rebalance portfolios if proportions of investment in various asset classes have changed from original investment plan. One should also check if their investment portfolio is well diversified, if the portfolio needs some diversification, some investment in fixed income products is advisable.
Avoid timing the market: It is well established that no one is able to time the market perfectly. It is near impossible to identify market bottoms and tops. If one has sufficient liquidity and will to enter the market, it is not advisable to wait for the bottom to make investments. Making investments in a staggered way by buying at each dip rather then going all in at once can help one get good average price for their buys.
Although, the Indian market is going through some turbulent times fundamentals of the economy are intact. India continues to be the fastest growing large economy in the world, the macro economic parameters are on an uptick, elevated crude prices are not permanent and the rout in the rupee is almost over. In this context, we are bullish on the economy and the stock market in the long run. The current turbulence and correction has made the Indian market somewhat attractive from a valuation perspective. Instead of focusing on sectors that may do well going forward one’s investment thesis should be focused on individual stocks, which have strong fundamentals and are currently available at attractive valuations.
(The author is director, wealth discovery, at EZ Wealth)