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Profit From Volatility - Axis Direct
Dec 27, 2019 | Source: AxisDirect-O-Nomics
Volatility is the new normal: Accept it and gain from it
The views and opinions expressed are of Mr. Arun Thukral, MD & CEO, Axis Securities.
The equity markets have seen high volatility in the past few months. This has been due to a number of factors viz. risk aversion caused by the IL&FS saga, NBFC liquidity issue on the domestic front and US-China trade war, rising US interest rates and US yields on the global front. Other factors like state elections, Brexit etc. have also added to the uncertainty in the markets.
But what does this volatility actually mean for an investor?
Equity is one of the best means to create wealth and wealth creation is a work of patience. The market serves as a medium to transfer wealth from less patient to more patient. Volatility creates a temporary anxiety in the markets, but at the same time, it also presents itself with a plethora of opportunities. Volatility exists in every market situation. History, however, shows that markets have a tendency to always recover from any downturn. The Lehman crisis in 2008 saw Sensex crash by about 60% in 1 year, but it jumped by over 150% in the next 1.5 years; in 2010, Sensex corrected by 28% in a year, but it jumped by about 96% in the 3 years after that; with the IT bubble burst in 2000, Sensex plunged by about 56% in 1.5 years, but it recovered and jumped by over 130% in the next 2.5 years, these are just a few of the examples. The markets have a way of testing your patience, but only those who wait, reap the fruits.
Besides, India is a long-term growth story. India’s GDP ($2.5 trillion now) is expected to double in the next decade. The market capitalization of equity markets is generally 80-90% of the GDP. So, with this growth in the GDP, the equity markets are also expected to grow. In such a scenario, we must adopt a long-term outlook and despite the short-term volatility, we must hold tight and ride with India’s growth.
What should be the investment strategy?
1. Make friends with volatility: Volatility in the stock markets is bound to exist. But, instead of seeing this as a headwind, one should take this as an opportunity. Any sharp decline in a good stock due to market volatility is a chance to get that stock at a cheaper rate and hence, should be accumulated for higher returns.
2. Don’t try to time the markets: Trying to move in and out of the market can be risky. It is almost impossible to consistently predict the movements of the markets. Hence, one should invest in equities keeping a long-term horizon in mind.
3. Stock Selection: One should invest in stocks which are fundamentally sound and have good management and growth prospects. Again, it is important to keep a long-term horizon and you’ll see your investment grow manifold. For example, despite all the volatility in the last 10 years, Britannia has grown by about 26x, Maruti by about 15x and VIP Industries by about 46x.
4. Keep a staggered pattern of investment: Investing through SIP route is a good option at the moments of volatility as it will help in averaging the cost and reducing the risk of timing the market. If someone is new to investments, SIP would also help to learn discipline in investing and provide the flexibility of amount, period and interval for investment as per their convenience.
Volatility is becoming the new normal now. We need to accept it and it is very important to see it as an opportunity. The recent decline in the stock market is a chance like never before for the investors to create wealth. The stock market is all about patience as rightly pointed out by American investor John Paulson,” Stock market goes up or down, and you can't adjust your portfolio based on the whims of the market, so you have to have a strategy in a position and stay true to that strategy and not pay attention to noise that could surround any particular.” Those who stay invested see their wealth grow exponentially. While investing, it is important to look at the larger picture, invest in fundamentally strong stocks with a long- term horizon and use market corrections to accumulate good stocks.
Related Keyword
Financial Planning
SIP
Equity
Investment plans
AxisDirect-O-Nomics
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