Embrace volatility and ride the wave

Risk is inherent in any activity and equity markets are no exception. Apart from company- and sector-specific risks, there are different macro risks that influence the markets as a whole and all the companies as well. This has a bearing on portfolio returns and the intrinsic values.

The broad movements in times of macroeconomic changes are often characterised by volatility. Some examples of these are unemployment data, monetary policy and interest rate changes, industrial production data, agricultural output, exchange rates, commodity prices, monsoon forecast, etc.

In India, crude oil prices play a significant role in market volatility. Now, with the general election in progress, markets are increasingly volatile and market participants are worried about political stability. Caution in the market would be their mantra — mainly avoid big calls on the market and do selective stock-picking.

Key lessons

So while volatility cannot be wished away and has to be managed deftly, what are the key lessons every market participant needs to draw?

Volatility is one of the significant factors that lend dynamism to market investments. An investor needs to have a vigorous and varied investment strategy to manage wavering markets. This should be such that they can continue to benefit from strong economic growth factors and at the same time manage and even benefit from volatility.

Sharp volatility is frightening for most investors and, barring seasoned ones, a majority are prone to making bad decisions. Typically, a large number of investors enter the markets when indices are at the top and company valuations are breaching the roof. They tend to sell on panic when markets are volatile.

On the contrary, one should maintain adequate liquidity to capitalise on the investment opportunities that volatility throws up. Be ready to confront the change. Instead of fearing volatility, accept it and benefit from lower stock prices, use it as a buying opportunity.

Realistic goals

Be realistic — define risk and expected return accurately. Do not expect too much profit too fast. Successful investors control losses quickly and seldom lose money big time. Use strategies like hedging with options and limiting orders to sell stocks automatically should the prices drop by 10 per cent.

Be clear with your investment objectives and risk appetite. Have a simple strategy and revise it frequently so as to avoid deviating from the objectives. Review performance at least one or twice a year, and rebalance your portfolio. Analyse the past and understand the present and the future.

During volatile times, do not play on margins, that too with leverage. Sophisticated investors resist the urge to take market positions in a volatile market, especially with borrowed money.

Investing in mutual funds is a good way to manage volatility. Decently performing MF schemes have generated returns above 15 per cent in the last 10 years. Volatility offers the right time to buy if an investor believes in the long-term potential of a fund.

The writer is CEO of Taurus Mutual Fund

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