Volitility Won't Vanish

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Over the last six months or so the stock markets have been quite volatile. Though the Sensex has been down by around 3 per cent over this period, the volatility level can be gauged from the fact that the Sensex crossed the 21,000 level in November 2010 before spiralling down to the current level of 17,700. Many of the investors have been waiting on the sidelines for the markets to fall so that they can begin investing. Even now that the markets are down by around 16 per cent from the peak, the wait still continues for many of them. Unfortunately, an opportunity for long-term serious investors is being perceived as a panic situation.
Needless to say, investors are not feeling confident about taking the plunge as it is extremely difficult to predict the short-term direction of the stock market considering issues like inflation and oil prices. The question that is faced by investors, especially those who are looking to include equity funds in their portfolio for the first time or re-enter into these funds having exited earlier, is about the right time to start investing. As we all know, volatile markets often make us emotional about our investments and jittery about shortterm losses. However, beginning the process, slowly and steadily, may not be a bad idea at all. After all, for someone who wants to invest in equity funds for say ten years to build capital, how much impact a fall of 4-5 per cent can have on the long-term prospects of the portfolio? Even to tackle volatility over the short term, one can follow the strategy of investing a part as a lump sum and the rest systematically. Moreover, those who intend to invest through a Systematic Investment Plan (SIP), the current volatility should not be a stumbling block as a disciplined approach allows them to benefit from averaging. This goes a long way in not only turning volatility to one’s advantage but also in enhancing the overall portfolio return.
For those who are not familiar with the equity markets, it is important to put volatility in perspective. The fact of the matter is that irrespective of the instruments you invest in, you still have to contend with volatility. Volatile markets often compel even the existing investors to abandon a carefully designed investment strategy. Obviously, it is not a smart thing to do. For an existing investor, the best way to deal with short-term volatility is to stay away from it altogether. Simply put, by remaining invested, one minimises one’s chances of missing out on the sudden rallies in the market. Then, there is a set of investors who invests in recurring deposits (RD) for years due to the perceived safety of capital and fixed returns.

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While one has to consider one’s risk profile before choosing an investment option, the gap in the understanding of risk itself can make an investor sacrifice healthy returns in the long run. For example, for a long-term investor, inflation is a bigger risk than the safety of capital. Similarly, for a short-term investor, the safety of capital is more important than earning higher returns. That’s why investing in equity funds through SIP can be a better option for such investors. If one is not comfortable with full exposure to equity funds, equity-oriented or debt-oriented balanced funds can be considered. While an equity-oriented balanced fund provides higher exposure to equities than debt, a debt-oriented balanced fund invests more in debt instruments than equities. Resist the temptation to realign your long-term portfolio. While ignoring short-term volatility in the stock market is the right strategy, many investors get swayed by short-term reactions and in the process get tempted to tilt their long-term portfolio in favour of debt instruments.
Remember, as happens with equity funds, even debt oriented funds get affected by the interest rate movements.Therefore, we may see a different picture with regard to the returns offered by debt funds after six months or so. Though, as an option, FMPs offer a decent combination of safety and returns in a rising interest rate scenario and including them in the portfolio at the cost of equity funds may not be a wise thing to do. However, FMPs can definitely play an important role in improving the returns on that part of the portfolio that you may have allocated to debt and debt-related instruments.