Tuesday, August 16, 2011

Market correction: How to make wise investments in uncertain times

For equity investors, the past two weeks have been a replay of the 2008 nightmare. The Nifty has not exactly fallen off the cliff as it did in September 2008, but the 8% decline since 1 August is worrying chartists and fundamentalists alike. Some analysts say the Nifty is headed for 4,500 levels. Others claim this is an oversold market and stock prices will eventually bounce back. What should the investors do?

"The worst thing to do right now is panic," writes Dhirendra Kumar, CEO of Value Research. He points out that overleveraged speculators and panic-stricken investors were the only ones who lost money in the 2008-9 crash. For the disciplined long-term investor, the spectacular decline in the markets that saw the Sensex hitting a multi-year low was actually an opportunity.

He is correct. We did a bit of data crunching and found that there is virtually no risk if you invest in stocks for the very long term. The Nifty data for the past 15 years shows that if you remain invested for longer periods, the risk of loss comes down progressively (see graphic). If an investor had held the Nifty shares for at least seven years, he would have made no loss. If he had held these for at least 10 years, he would have earned a minimum return of 12.13%. On the other hand, short-term investors, who exited within 1-2 years, had higher chances of running into losses.

It's difficult to get this argument across when investors are staring at an 8% dip in the index, the world's largest economy has been downgraded, and other developed nations are on the brink of debt defaults. Even so, here are a few steps that can help cushion the impact of volatility and ensure that investors don't get carried away by the predictions of doomsayers.


Don't even think about terminating your SIPs at this point. It's the worst thing you can do to your portfolio and would defeat the very purpose of the SIP. If you stop now, you are effectively turning down the chance to buy more at lower prices. It's a common mistake that can prevent your attempt at rupee-cost averaging. "The impact cost of stopping a Ulip premium is higher than terminating an SIP, so many investors opt for the latter. Investors tend to be cavalier about their mutual fund investments, but are very diligent about Ulips," says Jayant Pai, vice-president, Parag Parikh Financial Advisory Services. He advises that investors should automate their investments so that there is no discretion in their reaction to the noise emanating from the stock market.


It's now amply clear that the economy will take some time to regain momentum. Slower growth rates, high inflation and high interest rates are here to stay. When the economy was growing at 9%, the tide had lifted all boats and the mid-cap and small-cap companies flourished. Now, with economists projecting a GDP growth of 7-7.5%, only large companies will be able to clock good growth, while the mid-sized companies will barely manage to stay in the green. Smaller companies will have to struggle and could easily slip into losses if the situation worsens. It's best to stick to large-cap stocks in the coming months instead of risky mid-caps and small-caps.


Even within the large-cap universe, you will have to be careful while picking stocks and sectors. Metal stocks, for instance, may be in for an extended downturn because of falling commodity prices. IT stocks that depend on foreign markets for revenue may also be under pressure. FMCG stocks may be overpriced. Conduct thorough research before you place that buy order with your broker. 


The infrastructure sector has been badly beaten down but analysts expect it to do well when the economy revives. "It's a good time to start nibbling at some infrastructure stocks at these beaten down levels," says Dipen Shah, senior vice-president and head of research, Kotak Securities. Even so, don't put all your eggs in the infrastructure basket. Spread your bets-and risk-across a basket of stocks and sectors. If investing in mutual funds, go for the stability of large-cap diversified equity funds. Avoid sectoral funds that take a focused exposure to a certain theme or industry.


The markets are down to attractive levels but there is no knowing where the bottom is. It's best not to anchor yourself to an index -say 4,700 or 15,000. To avoid buying high, don't invest lump-sum amounts, but do so in monthly instalments. In this manner, you will be able to gain the advantage of the rupee-cost averaging that the SIPs offer.  

Source : ET

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