Stock market volatility in India is something most of the investors have witnessed who are investing for a few years now. Unlike currently, the market does not go higher and higher every week making a new all-time high. There were times in the past when the stock indices were down 30% in a year. In March 2020, nifty touched the 7600 levels before jumping again to 18000.
The whole point is that markets fall as well which gives bearish investors and short-sellers an opportunity to mint money in a falling market. Many novice investors wonder how to deal with market volatility? They think about how they can take their portfolio in green when it is in red with 20-25% losses. This article will explain the way to tackle the stock market volatility in India using some fundamental strategies.
Let’s look at these strategies one by one to have a comprehensive understanding of how to be positive when your portfolio is negative. Here it goes:
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Diversification:
This is a simple concept that has been effective for many decades now, it is also put forth in many finance theories. In simple terms, diversification theory teaches us not to put all eggs in one basket. It is not sensible to put all your investment amount in one or two stocks, or a few companies from the same industry. This market volatility strategy has two sub-components that are explained below:
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Diversification by Industry:
Your portfolio should have companies from diverse sectors. Academic theories suggest having sectors with a negative correlation with each other. There is no meaning to have all the steel or banking stocks in one’s portfolio. This is because when the steel or banking sector is in distress due to external or internal factors, your portfolio will be in deep trouble. Thus, to effectively deal with market volatility, have stocks from steel to banking, and from pharmaceuticals to the automobile.
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Diversification by Asset Classes:
This type of diversification is across the asset class. Your investment portfolio should not only be equity-based, rather it should have a combination of debt securities (bonds, commercial papers, G-Secs), gold, mutual funds, ETFs, sovereign gold bonds etc. This market volatility strategy will help your portfolio when equity markets are down 30-40% in a year.
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Use Derivatives (F&O) to Your Advantage:
Derivatives are advanced versions of stocks in the market. They derive their value from the underlying asset (usually an index or a stock), and thus it is named as ‘derivatives’. The derivative segment is dominated by Futures & Options (F&O) that are actively traded in the Indian stock markets. Both futures and options are contracts between a buyer and seller to buy a security at a pre-defined price on a pre-determined date.
Options have Call and Put sub-category, now if you are long in a stock, then you can buy a Put option of that stock. This is an effective way to deal with market volatility since if the stock price goes up, then your share will generate profit for you. However, if the stock price movement is opposite to your expectations and it falls, then the Put option will generate profit for you. Likewise, buy a Call option, if you are planning to short-sell a stock to hedge your position. Also, you can take Futures instead of options to perform the same job of hedging against market volatility.
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Stick to your Plans:
In situations of extreme volatility in the market, the first thing one has to be cautious of is not panicking. You should not engage yourself in panic selling, just because everyone else is selling. A recent example was the March 2020 fall in indices, if investors would have sold everything back then when Nifty touched 7600, then they would be regretting now when Nifty has breached 18000 levels. Sticking to your plan based on your financial goals is a simple yet so effective market volatility strategy. If you believe that you have fundamentally sound stocks with growth potential in your portfolio, then don’t get affected by small blips here and there.
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Seek Professional Help:
For novice investors who have not seen a correction in equity markets before may get panicked by a sudden crash in stock prices. However, before taking a decision to liquidate your entire portfolio, it is advisable to reach out to a veteran investor and take his insights or hear what fund managers are saying about any correction in the markets. Their inputs and your research will help you effectively deal with market volatility.
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Averaging the Price:
Instead of joining the race of panic selling, these times of volatility should be an opportunity to buy more shares of quality companies instead. This is known as rupee cost averaging (RCA) that brings down your average buying price of any stock. This is an effective market volatility strategy that works in every panic situation in the market. You just have to keep purchasing those fundamentally sound companies’ shares at multiple lower levels in a volatile market. This strategy is known to work wonders in the long run in creating your wealth.
Conclusion:
This is all we had for you in this edition of 5 ways to deal with market volatility. We hope you have a fair understanding of how to behave with money in times of volatility in stock markets. The aforementioned strategies are time tested theories that have proved to work effectively for investors in the past.
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