Volatility in financial markets is not for the faint-hearted. Many would have realised that last week.
The sharp slump during the day and then a bounce back in benchmark indices like S&P BSE Sensex and NSE Nifty tells you just one part of the story. If you dive deeper, you will see a bloodbath in small and mid-cap shares and banking sector stocks.
On another front, the Indian rupee is weathering a storm amidst turmoil in emerging markets. It continues to hover around record lows.
Over the past one month, financial markets have moved from being just volatile to ‘near panic’ situation. The benchmark indices like Sensex and Nifty shed 3.7 per cent while mid-cap and small-cap shares fell anywhere between 6-9 per cent in value.
The Indian rupee has shed close to 5 per cent in just one month against the US dollar. It is down sharply by around 15 per cent so far in 2018.
What happens to your investments?
If you own shares of companies directly, you will see a sharp fall in your portfolio value as it gets reflected directly. The selloff in shares and fall in their prices for a few days does not mean companies are going to make losses. If there is a selloff across the board, you would like to take that brunt. If you have been smart enough and bought shares in technology and pharmaceutical sectors over the past one month, you would be actually sitting on profits as the Nifty IT index is up 4.6 per cent and the Pharma index is up 3 per cent.
If you are an equity mutual fund investor, you will see a moderate fall in the value of your mutual fund portfolio. Since your investments are diversified, you need not panic much. The fall is merely 1-2 per cent on an average in large-cap diversified equity funds. The fall in mid-cap and small-cap mutual fund values over the past one month are 2-6 per cent.
If you are an investor in government fixed deposits, National Savings Certificate and public provident fund, the interest rate on your investment has inched up by 0.3-0.4 per cent. There is absolutely no need for you to worry about on this front.
The Dos and don’ts
The sharp surge and fall in equity markets can pose serious questions for investors and savers. The natural instinct would be to pull out money from equity markets and put it in safe investments like government fixed deposit schemes. Your equity investments are not for short-term returns. They are to be held for over 10 years. They typically ride through multiple peaks and falls like the ones that happened last week.
As someone with an investment horizon of at least 10 years, you must plan your strategy. If you are a direct equity investor, you have to buy shares of companies that are considered as ‘defensives’. These are businesses that sell goods and services to consumers in India. Volatile financial markets do not necessarily mean people stop consuming toothpaste, stop buying cars or mobile phones. Besides this, you may want to increase your allocation to companies earning their revenue and profits in foreign currency through exports. The gains registered by IT and pharma companies amidst this turmoil are a case in point.
The other important thing is a sharp fall across the board also makes good companies look attractive. In today’s context, attractive companies could be those earning revenue in foreign currency, selling consumer products to Indian consumers and have minimal debt on their balance sheet. You may want to seek professional help in identifying such businesses. There is a lot of information available and your financial advisor can help you do that.
If not buying equity shares directly, you may want to pick mutual funds that own such businesses. Again, do consult with your advisor to choose the right fund. If you want to directly own shares, try owning companies that are a part of the major index like the NSE Nifty or BSE Sensex.
A tailspin in the financial markets should not be treated as a panic situation. Instead, you may want to try sniffing out opportunities that could make a difference to your wealth in a decade from now.
(The author is a publisher and founder at Simplus Information Services Pvt. Ltd.)