Mr Sameer, a prudent investor is flummoxed. The BSE Sensex goes up one day by 200 points, and comes crashing down by 450 points, the very next day, only to rebound by 250 points the next day. Volatility — at its extreme. And its time we accept the volatility in the Sensex and our surroundings, without losing focus on our investments and the methodology of creating wealth.
Basic Principles
We always advocate, invest with a time horizon, pre-defined goals, liquidity needs with asset allocation (after understanding the risk profile). This credo, is the base. And keeping in mind this credo, will ensure that the volatility does not stump you.
Asset Allocation
It is one of the pillars on which the investment process is decided. Say, you have a debt: equity ratio of 60:40, and the last 18-months, the rise in the equity market, has increased your equity allocation to 50 per cent, its time one rebalances and decreases the equity holding by 10 per cent or effect fresh investments in debt. This will ensure that resources are allocated as per the asset allocation. If you feel that, the equity market can decline further, you could book profits and let only the principle remain invested.
Here, we used, portfolio rebalancing as a tool to ensure the asset allocation strategy is followed. This strategy can be used across asset classes and financial products.
For those who have exposure to mutual funds, and more importantly to equity mutual funds, one could recommend continuance of the SIP’s (Systematic Investment Plan).
Also, for a very conservative investor, whose SIP’s are over a year old, one could look at booking the profits of the investment (along with the principle, if required) and invest in a liquid fund, and then undertake an STP (Systematic Transfer Plan), on a weekly or fortnightly basis, into the equity mutual fund.
This strategy works well in a volatile market, where the markets could rise or fall, and the investor is not really aware of the direction the market will take. Also, lumpsum investments in equity mutual fund, should be routed through the STP process, which has been shared above.
Direct equity is always stock specific. If in the portfolio, one has the stocks which are there on account of ‘tips’ or ‘insider news’, it’s time to exit . At times of volatility, these are the kind of stocks, which would fall sharply.
In the post Diwali slide, there are a number of stocks, which have lost more than 50 per cent of the value. At the same time, fundamentally sound stocks in the consumption, banking space have also been beaten down.
So, it could be a good opportunity to buy a few of them gradually. Every dip should be looked at as an opportunity to buy quality stocks.
Increasing interest rates, have brought back the bank fixed deposits in vogue. Do understand that for those in the highest tax bracket, 30 per cent of the return is taxed.
Tax efficient instruments as in Fixed Maturity Plans, need to be considered. Managing risk as compared to risk aversion is the recommended approach.
Brijesh Damodaran
Founder and Managing Partner – Zeus WealthWays LLP and can be contacted at brijesh@wealthways.in [1]
Links:
[1] mailto:brijesh@wealthways.in