Volatile markets? Keep calm and carry on

In the current market volatility, you can choose to book profits or buy cheaper stock.

Last Monday, many investors would have been reminded of this Warren Buffett quote: “Unless you can watch your stock holding decline 50 per cent without becoming panic-stricken, you should not be in the stock market.”

For a while, it seemed the markets were going on a free fall.

Things improved during the week.

After a 1,600-plus points fall, the markets recovered by a good 1,000 points in the next few trading sessions.

Investors would be more relaxed now but many would be wondering how to deal with such volatility.  

Nilesh Shah, managing director, Kotak Mutual Fund, says: “Make volatility your friend.

Correction gives an opportunity to an investor to buy cheaper. Prices might fall; value does not.

In fact, valuation normally becomes attractive with a price fall.”

Some like Sudipto Bhattacharya are actually enjoying this market volatility.

“If one uses some common sense, like if the US markets are down the previous day, then India will feel some pinch, there is money to be made.

I shorted when the markets were expected to go down and went long on the index, with tight stop-losses in a rising market,” says this finance professional.

For example, when Bhattacharya went long at 7,800 points on the Nifty, he kept a stop-loss at 7,770 and kept tightening it during the day, so that it would get triggered even at the slight turnaround.

“There is a good chance of making money when the volatility is high, instead of a staid one-way market,” he says.

Trading is, of course, not meant for retail investors who do not have the understanding or wherewithal for this.

Says investment expert Arun Kejriwal: “There is a difference between a trader and an investor.

Volatility is the bread and butter of a trader. It is not the same for an investor.  

Adds Sundeep Sikka, CEO, Reliance MF: “Investors should remember that they should not time the market.

Whoever stopped investing in 2008 would be a loser today because of the sharp turnaround in the fortunes.”

There could be more pain

First, investors should be ready for some pain in the days to come. The VIX (volatility index of the National Stock Exchange) hit a 15-month high on Monday.

Though things have improved since then, even on Friday the VIX was up seven per cent from Thursday.

Clearly, while there has been a lot of talk about how India will not suffer too much due to China’s woes, things aren’t that simple.

Both Bhattacharya and Kejriwal believe there will be pain.

However, there isn’t consensus on how long this will continue.

Some believe three months, others six months or more. “Though the large part of the damage has been done, recovery will take its own time.

And, I do not believe that there is any decoupling from China because there will be repercussions on the Indian economy and markets due to it,” adds Kejriwal.

Should you completely stay out?

Not necessarily.

Kejriwal says while trading is not advisable, it could be a good time to weed some bad stocks or MFs and buy some stock which becomes cheap.

For example, if you hold stocks for over a year, and it is trading at an all-time high, you could book some profits.

Yet, remember that it does not make sense to sell these for a small profit if being held for less than a year, as there will be a 15 per cent short-term capital gains tax.

If it has been held for over a year, there is no capital gains tax.

Bhattacharya, while admitting he has not traded aggressively on stocks in the past week, says some buy or sell in good quality stocks can be done because this volatility is expected to remain for some time.

“If you are sitting on good profits, selling makes sense because there is always another entry point in such markets,” he says.

The good news

Retail investors can take heart from this bit of data.

Since 1981, the Sensex has fallen a little over five per cent as many as 51 times in a single trading session but has risen above five per cent on 71 occasions.

The gains outweigh the losses by a big margin.

More important, after falling over five per cent on a single day, the market rebounded on 32 occasions in the next one year.

Its best performance was in 1992, when the Sensex rebounded by 208 per cent after falling seven per cent in March 1991.

Fund managers take heart from these numbers. “Our recommendation to investors is to do an systematic investment plan in equity funds, with an investment horizon of five to ten years.

One can also improve on the SIP by investing additional money during a correction phase like we witnessed recently,” adds Shah.

Says Sikka: “Investors can take heart from the fact the large-cap funds have outperformed the indices by a big margin, despite the recent fall.

When MFs are giving you an alpha of over 10 per cent vis-a-vis the benchmark index, there should not be any reason to worry.

According to Sikka, it is important while investing to look for funds that have survived both peaks and troughs. In other words, look at schemes which have been in the market over 10 or 15 years.

This will give you a fair idea of how the fund manager or the management of the fund house has performed.

Illustration: Uttam Ghosh/Rediff.com