Investment strategies for volatile markets

Source: The Hitavada      Date: 04 Feb 2019 09:22:35


By CA Julfesh Shah,

Every investor starts investing with certain expectations and goal in mind but what they don’t consider, is that determining your investment mix is as important as finalising your goal.  It is important to understand that every investment has different strengths that allow playing a specific role in your overall strategy. Because you have multiple goals, you need a combination of investments to help you achieve short-term and long-term objectives. Identifying and finalising on an asset allocation becomes particularly crucial when dealing with volatile forces in the market.

The Indian equities are expected to remain volatile. And here we are about to face the general elections in the coming months and there is talk around the impact of elections on existing stocks and mutual funds returns.
With the information overload, we see nowadays, investors keep pressing the panic button and keep asking whether they should change their portfolio and what should be their overall strategy in the light of the upcoming  elections. Election is really a temporary phenomenon and only affects sentiments for a short–term period, never overa long term.
So there is no reason to worry if you have invested for a long-term financial goal that doesn’t require any change of strategy due to temporary market movements. Only thing you need is an asset allocation strategy that seeks a balance between risk and reward by adjusting the percentage of each asset based on the investor’s risk-taking capacity, goals and the time frame needed to reach those goals.

Below are few tips to ensure asset allocation to counter market turmoil: Properly identify an asset allocation strategy: Before starting to invest in financial products, decide the asset allocation based on your profile. The overall allocation can vary from one investor to another.
For example, an aggressive investor can have 80% in equity mutual funds, 15% in fixed income funds and 5% in gold.

Asset allocation is the function of one’s age, financial standing, financial goal, risk appetite, investment horizon and expected return; the thumb rule however is; 100 minus one’s age should be invested in equity. For example, for a 35-year old investor, 65% of the savings should be in equities. Diversify your investments: Financial markets are full of surprises and it is complicated to predict which asset class will go up or down.

Thereby, it becomes important that you build a portfolio with a basket of instruments, which enables it to play a specific role in your overall strategy. For instance, some investments may provide regular income while others may serve as a temporary place to hold for cash. Some even have multiple purposes and can fit in more than one role.
Don’t be sentimental: It is important not to get sentimental with your investments. Generally, if a particular investment isn’t performing well, then it makes sense to remove it. Yet when it comes to practice, investors do quite the opposite – people continue to drag certain investments in their portfolio; as booking losses would mean accepting mistakes.

Review your portfolio: Determining your portfolio’s ideal asset allocation is not a set-it-and-forget-it process. It’s important to regularly make sure your asset allocation reflects your current financial situation, time horizon and risk tolerance.  Choices you made one year ago may no longer be furthering your goals. Asset allocation rebalancing enables booking profits when markets are high and buying when they are low. Sensex remains highly volatile during election time. Besides, India has seen variety of governments ranging from coalition to a full majority in all these past years and during this time our GDP growth has been 6% - 6.5% on an average.

So, elections really do not make any real impact as such. In fact, what you should be focusing is earnings and growth.
Bear in mind that India is one of the fastest growing countries in the world and is well-placed to become a developed country in the next few years.  As long as the growth rate is 6% and grows further, there is really no need to worry for which political party is getting elected.
Focus on basics and a long-term investment philosophy should be followed. Don’t change your asset allocation because of the hype around you. It will not impact your returns.

At present, there is an overall global slowdown and earnings and growth are in the best shape. You should rather use this time gradually to invest in the market and optimise the benefits via Systematic Transfer Plan (STP) and Systematic Investment Plan (SIP) route of mutual funds, which will be able to maximise your wealth in the long run.

(The author is Member of Public Relations & Corporate Social Responsibility Committee of Institute of Chartered Accountants of India, New Delhi, and an industrial consultant)