The Indian stock markets have remained volatile since the start of 2022, giving retail investors constant jitters. Both benchmark indices, BSE SENSEX and NSE NIFTY, have seen corrections of close to 8% only in the last two months. Stock market corrections have also impacted returns of equity mutual fund schemes, specifically the small cap fund category. Despite the correction and the unexpected drift in investment plans, retail investors remain bullish about the long-term picture.
Most retail investors, especially those who are new to the markets, are raising questions on what should be the ideal strategy and should they enter or exit the markets this year.
Here, we will try to offer clarity to retail investors on the current market scenario and share guidance on the right strategy to be adopted for stock market investment.
Basing entry/exit decisions on market pace
In the current market scenario, retail investors are wondering, how slow is too slow when it comes to market performance? Many investors opt for a market entry timing that is closer to a speedy market when it is about to rally. Others wait for it to slow down completely. Investors often base their entry and exit in stock markets using technical indicators like moving averages, breakouts, etc.
As they say, no one can predict the stock markets. So, even an experienced investor may or may not know when it will slow down. Therefore, the entry/exit decisions should be based on multiple factors instead of only market pace.
Impact of inflation
Seasoned investors attribute the correction being witnessed currently to global and local inflation. Various geopolitical issues across the globe are further impacting the inflation. If the inflationary scenario continues to surge, then the market tide may temporarily change. To control inflation, the RBI announced interest rate hike recently, and this move has also negatively impacted the overall investor sentiment.
Until the direction of inflation impact is clear, investors who are currently invested should therefore hold off instead of selling at losses or breakeven points. Investors who are looking to enter must spread their entry across phases and in a planned manner.
Adopt re-balancing strategy
Higher market volatility can be used as an opportunity for portfolio re-balancing. Investors can maximise long-term gains by investing in equity during market lows. However, to ensure discipline in the overall investment approach, portfolio rebalancing should be done at specific intervals. This also applies to mutual fund investors. While rebalancing, any fresh equity investments must be made from a long-term perspective.
During scenarios like the ongoing market turbulence, instead of making fresh investments via the lump sum route, investors can opt for SIP to invest in a staggered manner. SIPs can be used both in direct stock investment and equity mutual fund investment to spread the overall risk across a longer time horizon and allow market correction to come a full circle.
Continue to focus on financial goals
Investors whose financial goals are far off should avoid exiting the market only based on volatility. Market volatility can give rise to sharp fluctuations in the short-term, often resulting in a significant drop in portfolio value. However, volatility is likely to phase out in the long-term and the portfolio value can revive if one remains invested.
Equity investment is ideal for long-term goals, since it can deliver potentially higher returns. Therefore, if an investor is nearing his/her financial goals, it is advisable to stay invested or switch to less volatile options like large-cap stocks.
Adopting stock exit strategy
Here are some tips that can be used by investors who want to exit certain stocks in a planned manner:
- Check stock fundamentals – Exit a stock only when the company fundamentals do not look good or have degraded due to lack of innovation or strategic initiatives.
- Switch to better stocks – Exiting a stock may also make more sense if an investor plans to switch to a better performing stock. This way, one can continue to enjoy market exposure instead of a complete exit.
- Check for overvaluation – If a stock is highly overvalued, it is advisable to exit it before its value erodes the entire invested capital.
- Financial needs – Investors who are facing a severe financial crunch may much rather liquidate some or entire stock market exposure to cater to the more urgent need at hand.
Conclusion
The global and Indian stock markets are expected to demonstrate volatility in the near future as interest rates are rising, FIIs are reflecting uncertainty, and inflationary pressures continue. Investors must, therefore, navigate through such volatile market phases very carefully and not make hasty entry or exit decisions.
FAQs
Since Indian stock markets are more globalised than a decade ago, they tend to be impacted by global market movements. While the market is heavily influenced by local factors, it continues to see an impact of global movements.
Bear market phases are ideal for investors who want to play the ‘buy low sell high’ game in stocks. With thorough research, decisions based on fundamentals and entering with a margin of safety, investors can sail through the bear market phases.
As per reports, the RBI may likely announce further rate increases this year to ensure that inflation stays under control.
High inflation is often correlated with lower equity investment returns as per historical trends. This can, however, differ across value stocks and growth stocks. Growth stocks perform better in low inflation conditions and value stocks rise during high inflation.
Large cap stocks are considered to be strong on fundamentals and therefore these can sustain bear markets better than mid-cap and small-cap stocks. However, it depends on the specific stock selected and factors associated with the company.
